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  • Trading Knowledge  >  Trading Basics

7 September 2023,09:21

Trading Basics

The Main Market Categories

7 September 2023, 09:21

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Bullion

Bullion refers to the physical gold and silver of high purity. The demand for bullion isn’t driven only by their practical use, but also by their role as investments and a store of value. Paper currencies come with all sorts of problems, like the risk of inflation in times of political and economic turmoil.

Gold and silver are safer bets in this respect because their value is independent of any particular country’s economic health, so issues like inflation and economic downturn don’t have as much of an effect.

When trading Bullion via a CFD, you don’t take delivery of any gold or silver, so the difference in the price between the buy and the sell will be cash-settled.

Factors that influence bullion prices
Like almost all other investments and commodities, the prices of gold and silver are driven by supply and demand. Given that most of the gold and silver ever mined is still in circulation, bullion price changes more with sentiment than the demand for jewellery.

Economic Factors

  • Low or negative real interest rates: During times of significant inflation, when real interest rates are relatively low, investors will seek the safe haven of bullion to protect their capital.
  • War: In times of great uncertainty, particularly when war is imminent, the demand for bullion increases as investors see bullion as a solid investment that will always have a stable value in any country.
  • Sentiment: Whenever crisis looms, the demand for physical bullion increases.

Opening Times
Pacific Union quotes bullion from 23:00 Sunday London time until 21:00 Friday London time. We offer prices in Bullion 24 hours a day during this period apart from a daily exchange break at 22:00 – 23:00.

Indices

A stock market index is a listing of stocks and a statistic reflecting the composite value of its components. It is essentially a hypothetical portfolio of securities that represents a portion of the market, or even the whole market. All stocks in an index will have something in common to tie them together, so the index is a tool to give a general gauge of market movement.

While there are specialised indices that track specific sectors like energy or electronics, most indices offered are broad-based, covering a country, region, or the whole world. They represent the performance of the stock market, as well as investor sentiment.

Some of the most regularly quoted market indices are made up of the stocks of large companies listed on a nation’s largest stock exchanges, such as the American Dow Jones Industrial Average and S&P 500 Index, the British FTSE 100, the French CAC 40, the German DAX, the Japanese Nikkei 225 and the Hong Kong Hang Seng Index.

Factors that influence indices
An index will reflect the general health and stability of that country’s economy and will be affected by the countries industrial and political activities. It is worth remembering that a country’s index is directly linked to the relative strength of that country’s currency as that will determine a company’s competitiveness on the international scene.

Industrial Factors

  • Trade Balance: This is the difference between the monetary value of exports and imports over a certain period. A positive balance is known as a trade surplus, meaning more goods have been exported than imported. The opposite is what is called a trade deficit. An increase in exports means either a strengthening competitive position at home and/or strengthening economies overseas are boosting the home country’s growth.
  • Industrial Production: Output for key industrial sectors such as manufacturing, mining, and utilities are highly sensitive to consumer demand and interest rates. This means industrial production is also key when forecasting economic performance and growth. It’s so important that it’s even used by central banks to measure inflation because high levels of industrial production can lead to uncontrolled levels of consumption, causing inflation.
  • Relative Currency Strength: This will determine the competitiveness of a company in the international arena. If the home country’s currency is strong, wages and production costs are going to be higher. In turn, the cost of the end product will rise too.

Political Factors

Political factors are important. They’re interwoven with economic conditions for many investors when making investment decisions, and include things like the political and social stability in a country, government policies, the regulatory environment, and central bank intervention.

Why are the prices of indices different on a CFD provider?

Often, market makers such as Pacific Union will have prices that are different from the prices quoted at the exchange. This is because the underlying contract is a future. For example, Pacific Union offers a rolling spot product, where any open positions at the end of the day are rolled over daily. Rolling over incurs an interest fee.

Therefore, a concept called fair value is applied to convert an index future into an equivalent spot price by removing the cost-of-carry involved, such as dividends, interest rates, and the current index value.

These fair values are monitored by dealers to ensure prices are relevant to the futures market.

You should also note that Pacific Union’s prices might occasionally differ from the cash market that you will see quoted on Bloomberg, Reuters, or any other reference source. This is because the cash price is calculated from a weighted addition of the prices of the constituent stocks. This can lead to a difference if a stock in an index is suspended or not trading correctly.

Foreign Exchange

The Foreign Exchange market (also commonly referred to as the FX, forex, or currency markets) is the single largest market in the world with an average of approximately $3 trillion worth of currency traded every day.

The market exists whenever one currency is traded for another. It consists of transactions between large banks, central banks, currency speculators, multinational corporations, governments and other financial markets and institutions. The FX market is an OTC (Over the Counter) market, in which participants directly with each other without the supervision of an exchange.

Factors that influence FX rates

Floating exchange rates are constantly changing and, like any other product, are influenced by the supply and demand for each currency. The factors that affect supply and demand can be generalised into 2 groups: Economic and Political.

Economic Factors

  • Relative Interest Rates: An interest rate is the returns an investor can make by lending money in that currency. If an investor receives an interest of only 3% in their domestic currency, but 6% in a foreign currency, that investor can increase their return by exchanging their money for the foreign currency and lending the money. The currency with the highest rates will tend to strengthen/appreciate as demand for it increases.
  • Purchasing Power Parity (PPP): This is a measure of what equivalent goods cost in two different currencies. If the EUR/USD exchange rate is 1.1200, and the same car in France costs €8,000 and in America costs $11,000, it would be cheaper for someone in the US to import the car from France (ignoring the cost of importing, tariffs etc.), as it would only cost €8,000 x 1.1200 = $8,960. Therefore, the country with the lower domestic PPP will see its currency weakening as consumers seek cheaper foreign goods, and consequently exchange their domestic currency for the foreign one.
  • Economic conditions: If investors see opportunities to invest in a particular country, they will exchange their domestic currencies for the currency of that country, leading to a rise in the demand of that currency and consequently its exchange rate. The factors that make international investors view conditions as favourable are complex and multifaceted but include things such as GDP growth, inflation, and taxation conditions.

Political Factors

Political factors are interwoven with economic conditions for many investors when making investment decisions. These include things like the political and social stability of a country, government policies, regulatory environment and central bank intervention.

Opening Times

Pacific Union begins quoting Foreign Exchange prices at 22:00 Sunday London time until 22:00 Friday London time. We offer prices in currencies 24 hours a day during this period.

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