How financial markets work
Who trades in markets, why prices move, the difference between price and value, and why markets trend.
A financial market is a place where buyers and sellers agree on prices for assets — shares, bonds, commodities, currencies, crypto. Today almost all of it happens electronically, around the clock and around the world.
Who is on the other side?
Every trade has a buyer and a seller. They include pension funds and insurers investing for decades, hedge funds and trend-followers, banks and market makers providing liquidity, companies buying back their own shares, central banks, and millions of private investors. Each has different goals, time horizons and constraints — which is why prices can move in ways that look irrational in the short run.
Price versus value
Price is what someone pays today. Value is what an asset is worth based on what it will produce — the profits of a company, the interest of a bond, the rent of a building. In the long run, prices tend to follow value. In the short run they follow supply and demand, which are driven by liquidity, interest rates, news and emotions.
Why markets move
- Earnings and growth drive stocks over years.
- Interest rates change what every future cash flow is worth today — when rates rise, most asset prices come under pressure.
- Liquidity — the amount of money looking for a home — can lift or sink almost everything at once.
- Sentiment swings between greed and fear, pushing prices above or below value.
Why markets trend
Information spreads slowly, big investors build positions over weeks, and people tend to follow the crowd. As a result, prices often move in persistent trends rather than random jumps. This is the effect trend-following strategies are built on — and one of the most robust findings in market research.
The big picture: the economy
Markets sit inside the economy. Growth, inflation, employment and central-bank policy — the macro backdrop — decide which asset classes tend to do well. You do not need to forecast the economy, but knowing how it connects to markets helps you stay calm when headlines get loud.
Key takeaways
- Prices are set by many participants with different goals.
- Long run: price follows value. Short run: supply, demand and emotion.
- Interest rates and liquidity move almost every asset class.
- Markets trend — which a disciplined process can use.
Put it into practice: a free account unlocks equity curves and signals for six core markets and the full glossary.
🔒 Open free accountEducational content, not investment advice. Disclaimer.