How Financial Markets Really Function – What The Private Investor Does Not See By Steve Pickering How do financial markets really function?
Primarily by supply and demand – “more sellers than buyers” as some would put it. Only that sellers and buyers must be in balance for a market to function at all. Take the forex (foreign exchange) market – probably the most efficient market there is. $2 trillion is the normal daily turnover and price information is instantly transmitted to hundreds of thousands of end users all around the world. Likewise, all economic news is absorbed into the price. Therefore the price at any particular point of time is the sum total of all the factors as reflected on by all the traders in the world. Until a new factor causes a trader in say, Hong Kong, to consider that the dollar is too cheap. Why? Because there is an economic advantage in buying dollars at that price – perhaps the short term Hong Kong dollar interest rate has dropped a few basis points, making it more attractive to buy U.S. dollars as a better investment. So he buys U.S. dollars, in the process moving the price higher. The new price
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