In this article, I wanted to provide an overview of various financial markets (or asset classes) available for investment & trading. I will highlight the current risks that exist in some of the key markets in another article called “Triple Bubble, a ticking Time Bomb” in more detail.
For most people that I have come across, financial investment means primarily buying stocks (or mutual funds) and real estate in some cases. Hence, I wanted to provide some exposure to the other large markets available out there. Following bullets list down some of the large markets and their approximate sizes. Please note that, these numbers change constantly and are estimates based on the data from various financial agencies.
Major Financial Markets
This primarily includes Stocks, Mutual Funds, ETFs and Options. As of December 31, 2019, the total market capitalization of all stocks worldwide was approximately US$70.75 trillion. Source: Wikipedia Link.
This is a parallel market to trade various commodities including crude oil, gold, other metals, livestock, agricultural products, and Equity Indices including S&P, Nasdaq etc. There are various exchanges, e.g. CME, Globex etc, where these futures contracts are traded. I will write another paper on Futures alone in future and will go deeper into this asset class.
The structured debt market (also called Bond Market) consists of treasury bonds, corporate bonds and municipal bonds. These bonds are rated as high as AAA to as low as D (S&P Rating Standard). Based on the ratings, these are either called Investment Grade or Junk Grade. As of 2021, the size of the bond market (total debt outstanding) is estimated to be at $119 trillion worldwide and $46 trillion for the US market, according to Securities Industry and Financial Markets Association (SIFMA). Source: Wikipedia Link.
The largest financial market (not considering real estate as financial instrument) is the Forex market. Over $6 Trillion is traded daily in this market, as compared to approx. $100 Billion per day in equity market. That is 50 times bigger than the equity market. This is probably the least exploited market by retail investors or novice traders. This is where the large institutions, government agencies and several large brokerages play a lot. Source: Wikipedia Link.
Real Estate Market:
Last, but not the least is the Real Estate market. It is very hard to estimate the exact size of this market, as it can only be done based on the annual sales data and not on what’s the total value of all real estate of the country or globally. Most of us are very familiar with this market, as many of us have bought and/or sold properties, be it residential or commercial.
The following is a pictorial representation of the 3 most defined markets (Equity, Bond and Forex) to compare their sizes to put in the perspective.
Bubble in the Financial Markets
Now let us look at what are the risks in these markets. What is a bubble? A Bubble in the financial markets refers to a situation in an asset class, individual asset or a group of assets (e.g. a sector), when the price of the asset(s) is way beyond the fundamental value of the asset(s). This happens when there is a huge euphoria and bullish sentiment driven by momentum, liquidity, high expectations and FOMO (Fear Of Missing Out). The fundamentals are ignored and left behind in this process. However, the bubble always bursts (matter of time) and comes back to appreciate the fundamentals at some point.
There is a lot more to learn about these Financial Markets, their comparison, Pros and Cons to help you decide what should you trade. I encourage you to register for a Free Trading Workshop to learn a lot more. Click here to register now.