Financial markets: What to know

Key points

Financial markets are platforms where assets like stocks, bonds, commodities, and currencies are traded. Each market has its own system and rules but plays an important role in economic growth and stability by helping businesses and governments raise funds and giving investors a place to trade.

What are financial markets?

While you listen to the news, you might hear phrases like, "The markets were up today" or "A market plunge continued for the third day in a row." But what do these statements really mean? 

In simple terms, a market refers to the buying and selling of related assets. Financial markets are platforms where assets—stocks, bonds, commodities, and currencies—are traded. 

For instance, when people talk about "the stock market," they often mean all stocks   traded on exchanges. When we say the stock market is up or down, we're usually referring to major market indexes—like the S&P 500 or Dow Jones—that track a group of representative companies. These indexes rise or fall based on the combined performance of their underlying stocks, giving a snapshot of overall market momentum.

Buying and selling assets takes place on the primary and secondary markets: 

• The primary market is where securities are first created and sold to help companies and governments raise capital. A common example is an initial public offering (IPO), where a private company goes public and sells its shares to the investing public for the first time. 
• The secondary market is where investors purchase securities from other investors, and prices can rise and fall based on demand. Examples include stock exchanges like the New York Stock Exchange (NYSE) and Nasdaq, as well as bond markets.

These markets are highly regulated to help protect investors, prevent fraud, and manage risks that could affect the broader economy. Regulatory bodies, such as the Securities and Exchange Commission (SEC) in the U.S., enforce rules to ensure fairness, transparency, and stability. They monitor market activities, set standards for financial reporting, and impose penalties for violations. 

The connection between market news and your personal finances can make obsessing over every market swing tempting. But don't get too caught up in daily fluctuations. Over time, the ups and downs tend to smooth out. 

Get the latest insights and updates on market trends

1. Stock Market

The stock market is where investors buy and sell shares of publicly traded companies. When you purchase a company's stock, you're essentially buying a small piece of that company, making you a shareholder.

How it works
This market operates through a network of exchanges, such as the NYSE and Nasdaq. Companies list their shares for trading on these exchanges, and investors can trade with one another to buy and sell them.

Market hours
During regular trading hours, Monday through Friday (excluding market holidays) from 9:30 a.m. to 4 p.m., Eastern time, anyone with a brokerage account can buy and sell stocks. However, the economy doesn't sleep, and significant market shifts can happen outside these hours. Premarket and after-hours trading are available through some brokerages, but they come with higher risks due to unpredictable pricing and lower trading volumes.

Considerations
Not sure if stock trading is right for you? Here are some things you might want to consider:

• Pros. Stocks offer the potential for high returns and capital appreciation, along with dividend income and access to investments in potentially fast-growing companies.
• Cons. Stocks are subject to market volatility and carry a risk of loss. Keep in mind that investing in stocks can be complex and may require time and research to participate. 

Vanguard offers stock trading in brokerage accounts. You can place orders on our website through the regular trade path in your accounts or by calling our investment professionals, which may incur an additional broker-assisted commission. We also offer extended hours trading from 4 p.m. to 5:30 p.m., but only for a select number of securities.

The stock market often fuels excitement and fear, dominating headlines with its value fluctuations. However, bond markets can also be newsworthy. A broadly diversified portfolio, including both stocks and bonds, can help blunt the negative effects of market ups and downs, while still offering upside potential.

2. Bond Market

The bond market is where debt securities issued by companies, governments, and municipalities are bought and sold. While stocks represent a small ownership stake in a company, bonds are loans you give to a government or corporation, which they pay back with interest.

How it works
Unlike with the stock market, there's no centralized exchange for bonds. Bonds are initially sold in the primary market, where companies or governments issue new bonds directly to investors. Once issued, these bonds can then be traded in the secondary market, where investors buy and sell existing bonds through brokers. These bonds can also be part of investments like pension funds, mutual funds, and life insurance policies.

Market hours
The U.S. bond market holds core trading hours Monday through Friday (excluding market holidays) from 8 a.m. to 5 p.m., Eastern time, with early and late trading hours also available.

Considerations
Here are some things you might want to consider if you're curious about trading bonds:

• Pros. Bonds can provide consistent income through interest payments and generally have lower risk and volatility than stocks. Bonds (and bond funds) offer diversification when added to a portfolio of stocks. They also offer liquidity in the secondary market. 
• Cons. Bonds typically offer lower potential returns compared with stocks and are subject to interest rate and credit risks. Additionally, the effects of inflation can erode the value of bond returns, and they may be less accessible on the primary market.

Vanguard offers bond trading in brokerage accounts and makes it easy to diversify with mutual funds and ETFs (exchange-traded funds). Early or late trading for the bond market is limited to certain types of bonds and may require the assistance of a specialist when placing orders. You can do this on our website or by calling to speak with a fixed income specialist.

3. Commodities market

The commodities market is a financial marketplace where raw materials and primary agricultural products are bought and sold. These goods are essential for various industries, such as manufacturing, energy, and food production.

A wide variety of goods are traded in the commodities market, including:

• Agricultural products. Wheat, coffee, corn, soybeans, and livestock like cattle and hogs.
• Energy products. Oil, natural gas, and coal.
• Precious and base metals. Gold, silver, platinum, palladium, copper, and aluminum.
• Environmental products. Carbon credits and renewable energy certificates.

How it works
The commodities market operates through regulated exchanges like the Chicago Mercantile Exchange (CME), New York Mercantile Exchange (NYMEX), and London Metal Exchange (LME). On these exchanges, buyers and sellers can trade standardized contracts specifying the commodity's quantity, quality, and delivery date.

Supply and demand dynamics, along with factors such as market conditions, weather, and global events, determine the prices of commodities. Clearinghouses act as intermediaries to guarantee the fulfillment of contracts and help make sure trades are fair and reliable.

Market hours
Commodities market hours are typically 24 hours a day during the weekdays, allowing for global participation and continuous trading.

Considerations
Wondering if commodities trading might be for you? Here are some things you may want to consider:

• Pros. Commodities are highly liquid, tangible investments that offer diversification opportunities within a broader portfolio, serve as an inflation hedge, and have the potential for high returns.
• Cons. Commodities markets are characterized by high volatility and market complexity, may come with transaction costs, and are subject to speculative trading and regulatory risks.

Vanguard offers mutual funds and other investment vehicles that incorporate commodity trading into their strategies, making it easier for investors to participate in this market.

4. Foreign exchange (forex) market

The foreign exchange market, also known as the forex market or FX market, is where foreign currencies are bought, sold, and exchanged. It's the largest and most liquid financial market in the world, with trillions of dollars traded each day. The forex market plays an important role in the global financial system by enabling currency exchange for international investment and trade.

How it works
In the forex market, currencies are traded in pairs. For example, if you want to buy U.S. dollars, you need to sell another currency, such as euros. The exchange rate, which reflects the relative value of one currency against another, determines the price at which these pairs are bought and sold. Traders can profit by buying currencies that subsequently gain value and selling those that lose value.

Unlike the stock market, which has a more centralized exchange, the forex market is a complex network of computers and brokers across the world. There are 3 main types of forex markets:

• Spot market. The most active and liquid segment of the forex market, where currencies are bought and sold for delivery within a few days. This market reflects the current exchange rate.
• Forwards market. Private agreements between 2 parties to buy or sell a currency at a future date and at a predetermined exchange rate.
• Futures market. Standardized contracts are bought and sold to deliver a specific amount of currency at a future date and predetermined exchange rate.

Market hours
The forex market allows trading 24 hours per day, 5 days a week. Trading sessions overlap throughout the day, starting in Australia before moving to Europe and ending in North America.

Considerations
If you're not sure if forex trading is right for you, here are some things you might want to consider:

• Pros. Forex trading offers high liquidity, 24/5 trading hours, low transaction costs, and hedging opportunities. 
• Cons. Forex trading is marked by significant volatility and complexity, and it's susceptible to market manipulation, economic and political risks, and a lack of central regulation.

Investing internationally comes with many benefits, like the opportunity for global participation, diversification, and exposure to high-growth markets. Vanguard offers international-focused investment products, which allow investors to participate in currency fluctuations of various emerging and developed markets.