Winning Edge Trading: Successful and Profitable Short- and Long-Term Trading Systems and Strategies

CHAPTER 4

Understanding the Financial Markets: Common Stocks

In the previous chapter, we established that active investing or tradingisis an essential requirement for financial prosperity and safeguarding your capital and portfolio. However, to make active investing work for you, you need to learn about trading markets. Trading or financial markets provide a medium to trade a security. Therefore, financial markets become an aggregate of all market participants who are either buyers or sellers.

There are many types of financial markets, some, such as the New York Stock Exchange, with physical locations and others, such as NASDAQ, that consist of only electronic systems and networks.

WHAT ARE FINANCIAL ASSETS?

In financial markets you trade assets for profits. There are two major types of asset: physical assets and financial assets. Physical assets produce economic output. They are part of the production and wealth creation process. Examples of real assets are buildings, plants, land, machines, technology, and knowledge that is used in the production of goods and services. These assets add real value to an economy. Since real assets are usually illiquid and have much longer turnaround times and require a great deal of wealth, we don’t trade them.

Financial assets, which are another major type of asset, deal with claims on the income generated by real assets. For example, it is difficult for most, if not all, of us to buy a manufacturing plant or major company. However, we could ...