Market: A market is where things are traded.
Anything that has value and can change ownership can be traded in a market.Trading is of many types and forms, and may involve the exchange of goods(Commodities), exchange of IOU's on goods(Futures), exchange of credit(Bonds), exchange of currencies... the works. But even if they gather in trading pits every day, and shout their lungs out through puts and calls... they like order. As a result, markets got classified on the basis of the physical nature of the items they traded in.
Stock markets:
Stock markets are those that make newspaper headlines everywhere. The Stock market of a country is widely considered as a barometer to how well an economy is doing. The BSE , and the NSE are two biggest stock exchanges in India.
The Sensex and Nifty are benchmark indices, and tracking these provides insight into short term and long term trends respectively. Stock markets basically allow companies to 'go public', i.e. they release a certain percentage of ownership of the firm to the public to invest, by means of an Initial Public Offering(IPO). The value of each share for an IPO is decided by a regulatory board associated with the exchange (For India its the SEBI (Securities and Exchange board of India)). As the public keeps investing in the scrip, the value of each share increases, and this consequently raises the value of the corporation as such. As usual, mega buys push the scrip up, and selling/short selling lead to corrections in the scrip.
Stock market and benchmark indices are very sensitive to global cues. For example... A rate cut by the US Federal reserve sees the Sensex soaring in the short term, because a lower interest rate means its cheaper to invest dollars anywhere... On the other hand... concerns over US recession have been hitting the Indian Stock market a tad harshly in the recent past.
Commodities/Futures Markets:
Commodities markets are generally used by people who are involved in the production of certain products that are traded in regulated commodity exchanges. These people hedge against an unwanted price fluctuation by agreeing to buy or sell a particular commodity at a certain price.
For example: A farmer producing Wheat intends to sell his produce at $4/kg, in the next 3 months. The spot price of wheat is hovering around the same mark, so its not really a problem yet. If the price falls however, he would run into a loss. In order to not run into a loss, this man hedges. He enters a contract wherein he has the right to sell his produce at say, 3.5$/kg. This way, even if the price of wheat bottoms out, he doesnt get cleaned out. That is, the farmer, though making a loss in the spot market, makes a significant profit in the futures market, thus ensuring minimum loss to him and his establishment. Vice versa, if the price of wheat rose above this mark, he would make a loss on the futures market, but make a killing in the spot market, which in a manner of speaking, limits his profit. Deciding where and when to hedge therefore can be a little tricky and requires experience.
The Derivatives Market:
Derivatives are financial instruments whose value is derived from the value of something else. The main types of derivatives are futures, forwards, options, and swaps. The main use of derivatives is to reduce risk for one party. Over-the-counter (OTC) derivatives are contracts that are negotiated and traded privately between two parties without the involvement of an intermediary or an exchange. Products such as swaps, forward rate agreements, and exotic options are almost always traded in this way. Exchange-traded derivatives (ETD) are those derivatives products that are traded via specialized derivatives exchanges or other exchanges. A derivatives exchange acts as an intermediary to all related transactions, and takes Initial margin from both sides of the trade to act as a guarantee. The derivatives markets are the financial markets for derivatives. The market is divided into two parts ie. for exchange traded derivatives and the other for OTC derivatives.
The Forex Market
The currencies market is perhaps the most important of the lot. Volume wise, its one of the worlds largest markets in the world. Question: If currencies are supposed to be traded, they must have some value... Question: How is this value decided? Its not really earth shattering when you finally realise that currencies are valued using, well, other currencies. One can trade in various currency pairs, for example the EURO/USD ( Which technically reads the amount of EURO's required to buy one US Dollar).
Though, the value of the currency pair can fluctuate owing to a number of reasons, the performance of one currency with another is largely attributed to the Import/Export balance that exists between these 2 economies, and comparitive growth rates. A country that has a deficit, basically fails to export the same value of goods or services, as it has imported. In order to procure these goods and services from some other country, this country (actually various corporations in the country, but big picture wise...) has to, in effect, buy the other currency, is lieu of its own. As this process continues, it becomes more expensive to procure goods or services, to invest in that country and so on. Result: Currency of Country A moves down in comparison to Country B.
A country that is posting strong growth rates will witness its currency become stronger with respect to others. The value of currency pairs is widely seen as a comparison of the strength of the 2 economies. Thus it is natural that currency values will also be sensitive to various global cues.
So now you know what different markets are. Lets trade:
The first thing one figures out while entering a market is its mechanism, that is what are the factors that cause a scrip/lot/contract to rise or fall, and how trends can be predicted. Once the tough part is out of the way, there are ways to capitalize on them:
Going Long:
When someone goes long, he expects the value of his Stock/future contract/commodity contract/Lot to increase. The intention is to sell at a margin at a later time, when the price is higher.
Shorting:
Who said you need to sell something only when you already have it? Short selling is when someone sells a stock/future before buying it at a later time. Whats in it for him? Well, between the time that he sells the lot and buys it later, the price of that lot drops, so buying it later isnt that expensive, which means: he pockets the difference. Many markets, thus, require traders to square off positions at the end of the days trade. Short selling is a high risk/high return strategy, and can result in small corrections in a scrip from time to time, and big corrections to your pocket, if not employed wisely. This trading technique came under the spot a few years ago, when studies claimed that it resulted caused certain scrips to nosedive, and that short selling was particularly harmful to small and medium scale scrips.
Stop loss:
A stop loss option is generally used when you do not want to be a part of the volatility in the market. Go long, and use a stop loss option, where you fix a minimum margin below which you will square the position. If the scrip crashes, exercise the option... and if you witness the rally, well that the beauty of it: its just an Option.
Support the Resistance:
A support level is the least stable value of a scrip in a time frame. A resistance level is the highest stable value of the scrip in that time frame, above which the scrip has failed to stabilize. Untill the time where the scrip falls below the support level OR rallies above the resistance level and stabilizes, it is considered to be range bound. It is important to understand the dynamics of support and resistance levels, because after that, its pretty much "Buy on a dip and sell on a rally".
So... now that we have seen conventional markets, lets take a look at some unusual but very profitable markets:
The Vegetable market:
The vegetable market draws sharp contrasts with any other financial market, because general trading strategies don't quite apply. In fact... the vegetable market has, over time, given rise to a trading strategy that is unique to the market itself: Haggling. The absence of a fixed price of any commodity at any given time completely changes the picture in terms of traditional trading methods. Though both men and women are capable of trading profitably in these markets, statistically, women have proved to be better and more profitable. The vegetable market made world headlines last year when Onions suddenly went on an unprecedented rally, due to a demand and supply mismatch. A certain Mr. Government was named responsible.
The Emerging market:
These markets refer to countries that align with other countries posting high growth rates, and call themselves the cornerstones of the next growth and wealth distribution cycle. These markets always claim that they are tired of subjugation by major world powers, and that a new era of emerging market power will usher in the next big leaders on the international economical platform. To demonstrate their newfound toughness, they call themselves the BRIC(k)s.
