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Financial Markets & Products

FinanceEquitiesSharesStocksCommodities
Exploring a range of financial markets and products
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What are equities?

Equities are the most basic and fundamental financial instrument. Otherwise known as stocks or shares, owning an equity is the same as owning a small piece of the company said equity is for. The sale of an equity could come in the form of friends or family choosing to invest a small amount of money into your new entrepreneurial idea in exchange for contract stating that they now own a small percentage of your future company. As your company continues to expand in size, you may seek to raise further capital by issuing equity to external investors to further fuel the company's growth. The final step in this process is for the company to be listed on a regulated stock exchange, which allows for the sale and purchase of shares to be conducted without direct management from the company.

A bit on stock price prediction

If you are reading this I have no doubt you have likely seen advertisements for trading systems that are guaranteed to be profitable, or TradingView indicators with a 90% win rate. While profitable trading systems absolutely exist, guaranteed profit does not. The reality is that prices in the stock market lie somewhere between predictable and completely random and the balance of that scale shifts constantly. A system that someone developed last year to trade Tesla stocks may very well be useless now. These trading systems need constant adjustments and research to be successful, especially if your plan is to develop an algorithm trading strategy that relies heavily, if not entirely, on technical analysis. In his book 'Paul Wilmott Introduces Quantitative Finance', Wilmott uses an example I love where he makes a very simple comparison between a stocks price and flipping a coin. We can say, with relative certainty, that the is a 50/50 chance a coin will land on one side rather than the other. However, even if we know that, we cannot be certain that it will land on heads even once in 5 flips. It is likely it will, but it may not. Even a system proven to be profitable over the last year may end up failing to produce any profits over the next year. If you go to the virtual coin tosser on the math mammoth website - https://www.mathmammoth.com/practice/coin-tosser - you can see this in action. Below is an image of literally my first attempt.
Virtual Coin Tosser Results
Virtual Coin Tosser Results

Now, that being said, I am not saying that long term profitable system do not exist. There are plenty of people who are very successful at generating high returns on investments with both technical and fundamental analysis. However, the knowledge they use to do this is built up over numerous years and plenty of failed investments. The key is to understand that being successful will take plenty of research, a lot of time, and a readiness to fail and lose some money. 


Dividends

A dividend is a lump sum payment made to shareholders usually every quarter or half year. It is usually calculated as a dollar amount per share owned; $0.01 per share for example. This dollar amount will usually change depending on the profitability of the company, and is decided by the company's board usually a month before it is paid.


Stock Splits

 A stock split is simply when a company decides to split existing stocks up in order to lower the overall price of their shares without reducing the value of the shares an individual owns. Say for example a company has a share price of $120 and they announce a three to one share split. If you owned one $120 share you will now own three $40 shares.


Commodities

Commodities are normally raw products, such as oil, precious metals, food, and so on. The prices of commodities are heavily affected by the products scarcity. The majority of commodity is traded via the futures market, where investors essentially make deals to buy/sell the product at a later date and then close the deal out before the product is due to be delivered. We will explore futures in a later section. 


Currencies

The Foreign Exchange, or Forex for short, is a market in which currencies can be exchanged. It is centred around the exchange rate, which is the rate that one currency can be exchanged at for another. On the Foreign Exchange, you will see that most often currencies are paired together. When you see a pairing such as EURAUD (Euro/Australian Dollar), it is showing the value that one Euro can be exchanged for into AUD. For example, if EURAUD is $1.8 then one Euro can be exchanged for $1.8 AUD. The image below shows the current daily chart for EURAUD in TradingView (taking data from OANDA). We can see that the value of the Euro has gone up significantly compared to the Australian Dollar due to the economic difficulties being brought about due to the Tariff situation happening currently.
EURAUD in TradinView
EURAUD in TradingView

Indices

A market index is typically a weighted sum of a collection of company stocks. Indices can be designed to represent a whole market, such as the S&P500 (an index that is comprised of the top 500 market cap companies in the US). Indices can also represent individual market sectors, such as the Vanguard Energy Index Fund ETF, which is comprised of Vanguards top energy sector company picks. 


Fixed-Income Securities

A fixed-income security is a financial product that returns a specified rate of interest for the duration that you hold it for. For example, banks often offer term deposits that allows its customers to deposit cash, which remains locked for a set period of time, and earn a fixed rate of interests in return. In a way, having cash in a savings account that earns interest is a type of fixed income security. However, the luxury of having immediate access to your cash comes with the cost of fluctuating interest rates that depend on the market; this is often referred to as a floating interest rate. Governments and other companies will issue fixed-income securities such as bonds as a form of borrowing. When you purchase a government bond, you are lending your money to the government in return for interest payments; these are called coupons. These will generally have a maturity date, at which point you will be paid a final interest instalment along with the return of principal amount you lent. 


Inflation-Proof Bonds

An inflation-proof bond, also called an index-linked bond, is a type of bond where the principal and coupon are scaled with inflation.