Are you thinking about starting to invest and in doubt about what the financial market is and how can you take the first steps in the area? So you’ve come to the right place: in this article, we’ll explain what you need to know about the subject. Financial markets are, by definition, an environment for buying and selling securities (shares, options, bonds,) foreign exchange (foreign currencies) and commodities (gold, agricultural products).
In the financial market, the investor is the one who has money left over and who wants to multiply it. The paths to this are diverse, but they start from the same premise: the money is destined to an application that offers valuation according to guidelines agreed between the parties. In fixed income, for example, the investor can project the income at the time of the investment: he will know if the money will appreciate in a fixed rate, with a defined annual interest, post-fixed, linked to an indicator, or hybrid, paying a fixed interest plus the variation of a price index. In variable income, on the other hand, there is no guarantee of return. An investment in a company’s shares on the stock exchange may rise or fall, depending on market interest. But if there are investors on the one hand, what is on the other end of the financial market? Resource borrowers. They are companies, institutions or people who want to raise money for various purposes, such as paying debts, financing machinery, among others.
HOW THE FINANCIAL MARKET IS DIVIDED
The financial market allows the economy to flow properly. When we talk about the “market” or “financial market”, it is not just about fixed income securities or shares on the stock exchange. Let discuss how the financial market is divided:
- Credit market: deals with bank loans. It is the market that you access when applying for financing or using an overdraft.
- Open market: takes care of publicly traded companies, that is, it trades its shares through the stock exchange, which regulates the supply and demand for the companies’ securities.
- Foreign exchange market: it is the trading platform for foreign currencies of the fair relationship between the currencies of countries.
FINANCIAL MARKET SUBDIVISIONS
The financial market can be subdivided as follows:
The capital market deals with securities, shares, and derivatives on stock exchanges, brokerage firms, and other financial institutions. When you invest in an LCI or LCA of an investment bank, you are investing in the capital market. When buying a lot of shares on the stock exchange, too.
The credit market is where short, medium and long-term resources are traded for people and companies that seek capital for working capital or consumption. The Central Bank is responsible for controlling and regulating this market and, through the Monetary Policy Council, dictates the basic interest finance of the economy, which is reflected in loans.
FOREIGN EXCHANGE MARKET
The foreign exchange market is where there is the currency exchange of one nation for the currency of another country. When you are traveling to the United States and want to buy dollars to guarantee your purchases or a trip to Disney, you are working in the foreign exchange market.
The money market is where short-term loans are made, with maturities of less than one year. Trading takes place mainly through Treasury bonds. The Central Bank and financial institutions are the agents of this market.
TYPES OF INVESTMENTS
The financial market offers two types of investment, fixed income, and variable income. Both are quite interesting and should not be dismissed by the investor.
The fixed income has much greater adherence than the variable. And the champion of applications is still savings.
Fixed income is the type of investment that offers a projection basis or the calculation of the exact return before investment. Securities like this can have fixed-rate yield, with a defined annual interest, post-fixed, linked to an indicator such as the CDI (Interbank Deposit Certificate, profitability reference), or hybrid, with a fixed interest plus the variation of the IPCA (Index of Broad Consumer Prices, considering the country’s official inflation).
Variable income is still little explored by individual investors in Brazil. In more developed markets, such as the United States, it represents a much larger share of investments.
In comparison with fixed income, the variable leads to greater volatility and greater risk of loss, although it offers the potential for higher returns.
For those just starting, it’s important not to allocate all of your reserves to variable income. Get to know your investor profile, find out if this type of investment makes sense to you
MAIN AGENTS OF THE FINANCIAL MARKET
Check below which are the main agents of the financial market.
In fixed income, bond issuers can be the Treasury (for government bonds ) or financial institutions (for private bonds). Analyzing the risk, in this case, it is easy to understand that you are putting your money in debt from the Federal Government, which undertakes to pay your money back plus interest. In the case of private securities, the risk is greater, since they are private institutions (banks or brokers).
The stock exchange is a stock trading platform for publicly traded companies.
The investor can act in the spot market, directly buying shares of companies he considers promising, or choose to invest in investment funds.
Resource borrowers are companies or individuals who need capital (for cash flow, working capital, financing, etc.) and are willing to pay interest on the money.
Investors are individuals or companies that wish to multiply their remaining capital.
Investment funds. Investment funds are an excellent way to enter the financial market, as they offer the chance for you to diversify applications without having great knowledge on the subject.
TYPES OF FUNDS
There are four types of funds considering asset classes, according to the Brazilian Association of Financial and Capital Markets Entities: fixed income, shares, multimarket and foreign exchange.
FIXED INCOME FUND
It focuses on returns through investments in fixed income assets (securities synthesized via derivatives are also accepted), with strategies that involve interest and price index risk.
It mainly has variable income assets, such as cash shares, warrants or subscription receipts, certificates of deposit of shares.
It is the most versatile of the funds and offers complex strategies, without any restrictions on allocations in certain assets or derivatives.
FOREIGN EXCHANGE FUNDS
At least 80% of the portfolio is destined to assets directly related or synthesized, via derivatives, to foreign currencies.