Words by Ayo Olubanjo and Thomas Berry, The Real Talk Blog
Our friends at The Real Talk Blog continue walking us through the basics of investing, this week offering a step-by-step breakdown of the financial markets.
Welcome to the second issue of The RealTalk Blog’s Investment Series, which aims to simplify and debunk the mysteries of the financial world to encourage financial literacy for all. If you missed the first issue, click here to read up on an introduction to Stocks and Bonds.
In this article, we’ll be covering what the financial markets are, what the bear and bull market terms mean and how to make use of the financial markets via equity fund investing (index funds and ETFs).
As always, we must stress that this article is not investing advice – we are not experts. If you are interested in investing in the markets but not sure when, where or how to start, please seek professional advice. All investments fall as well as rise in value, so you could get back less than you invest.
So, the financial markets?
Let’s start with a basic understanding of the markets – this is a place where goods and/or services are exchanged (bought and sold). Everyday examples might include a Tesco superstore, eBay or even a local farmers’ market, and the financial market follows the same principle.
Since we all love Investopedia, they define financial markets as “any marketplace where the trading of securities occurs, including the stock market, bond market, forex market, and derivatives market, among others.” Securities, in this instance, is a glossy financial term to mean any financial product, for example a stock, FX currency or a crypto coin.
This is, by all accounts, an accurate definition of the financial markets – but what does this mean for you and I? Not much on face value. That is, unless we know how to access these markets. Thankfully, that’s fairly easy these days, given the widespread use of the internet.
Common platforms where anyone can access the stock markets to buy and sell include Hargreaves Lansdown (HL), Trading212, Vanguard, Fidelity Investments and more! Bonds can also be accessed on some of the more institutional platforms, like HL or Vanguard, via their various account types. These platforms allow everyday investors like you and I access to stocks listed on the various exchanges around the world: London Stock Exchange, New York Stock Exchange or the NASDAQ, for example.
For our crypto lovers, these platforms include, but are not limited to, the likes of Binance, Coinbase, KuCoin, CoinDesk and eToro.
Each of these platforms will have different offerings, account types and fees, so it’s essential to do your research into the medium you plan to access the financial markets with.
Bull and Bear Markets
A key part of financial literacy involves getting used to big words and fancy terminology that often makes no sense. Bull and bear market terms are no exception.
The terms bull and bear originate from the way in which each animal attacks its opponents. A bull will thrust its horns up into the air, whereas a bear will swipe down. These analogies help us to understand what the terms seek to define within a financial context.
The bull market describes a situation in the financial market where prices are rising or are expected to rise. This is typically a good sign in a market or economy. In this situation, it is generally understood that businesses are doing well and investors are confident in their positive expectations of the market. Ultimately, for your long term investments, a bull market is a pleasant indication that there are gains (profits) to be made.
If you purchase a stock and you expect the bull market to continue, then this could result in you making gains on your investments. Profits will be realised once you have later sold the stock. (NB: profits can be realised earlier with stocks that pay regular dividends – check out our earlier Investment Series article for a quick reminder!)
The bear market, as you’ve probably deduced, defines the opposite situation. This is where prices in the market are falling for a sustained period of time – typically two months or more.
The bear market is not a good sign for those already in the market – investors in this position are pessimistic about its strength. In this instance, the potential for losses may encourage investors to sell their investments if the exposure to risk is too much to accommodate. On the other hand, the bear market might be the best time to get into the market when prices are low – but this can be tricky business, so proceed with caution!
Let’s leave it there for now…
We’ve promised coverage of equity funds, but it’s probably best to leave that for the next issue. Hopefully, this article has helped you to build on your understanding of the products we were introduced to in the Stock and Bonds explainer. Now, when you hear or see the terms bull and bear markets, you’ll know exactly what’s going on.
This article was originally published on The Real Talk blog by Ayo and Tom.
For more on how to manage your money, check out our personal finance and business articles.