What is a financial market, and how do I invest in them?
At Dabbl, we want to make buying shares as accessible as we possibly can – for everyone. To help with this, we’re running a series of blog posts covering a wide range of topics which impact the world of business, finance and investing. These snapshots have been carefully crafted to cut through the jargon and highlight some of the most important facts to consider in each subject.
We hear the term ‘financial market’ being used often enough. The evening news bulletin or Sunday paper will be all too ready to tell us how ‘financial markets’ have reacted to the latest political https://www.dabblinvest.com/blog/politics-and-the-stock-market or economic development, but just what does a financial market look like – and if you want to, how do you invest in one?
The classic image of a financial market is probably one of hundreds of people dressed in some kind of uniform, be that the suits and bowler hats of the London Stock Exchange before the 1980’s, or the brightly coloured traders’ jackets of the small number of open outcry markets that still exist today, like the CBOE in Chicago or some parts of the New York Stock Exchange. Prices would then be displayed on a large, central board, allowing participants to keep track of market movements.
That might sound all very exciting, but for the most part, today’s financial markets are ‘virtual’ with trades being placed online – either by humans or other computers – whilst buyers and sellers are matched on physical servers or even in the cloud. Live prices are shown on screens, records are held electronically and the speed of making a trade is measured in mere fractions of a second.
But regardless of the how it’s done, the underlying principle is the same. As with any market, a financial market brings together buyers and sellers, who can between them agree on a fair price for exchange. The more buyers and sellers we have, the easier it should be for matches to be made. What’s more, the greater the amount of information available, the easier it is for market participants to come up with a fair value. Critically, what a market is trying to determine is what something will be worth in the future.
So if you decide want to invest in financial markets, where do you start? As a regular investor, you can’t just knock on the door of the New York Stock Exchange, don a striped jacket and put your £100 (or perhaps more accurately $100) on the table to buy some shares. However, there are a number of options open to the general public.
Even putting cash on deposit at a high street bank could be considered investing in the financial market. The bank will themselves lend that money out to someone who needs a loan and you as the investor will hopefully be paid some interest on your investment.
Or maybe you want to invest directly into a company you want to support, be that because you simply believe in what they are doing or think they are destined for growth in the future. To do that you need to find someone such as dabbl https://www.dabblinvest.com to buy and sell shares on your behalf, as well as look after the inevitable paperwork which includes things like tax vouchers and dividend payments.
Alternatively, perhaps you want to hold a basket of investments with a specific theme, industry or geographical sector in common. That can be done through Investment Trusts, Unit Trusts (sometimes just known as ‘funds’) or ETFs. Again a company like dabbl can help here, you can go straight to the fund provider, or you may even want to talk to an independent financial adviser.
Different financial products can be seen as being more appropriate depending on what you are wanting to achieve. Saving for next year’s holiday, a deposit to buy a house in 10 years’ time or for retirement 40 years in the future are all very different propositions. It’s vital you take this into account and understand any tax advantages – like pensions and ISAs – which may help meet your savings goals.