Understanding Financial Markets
- Aug 5
- 5 min read
Forex, CFDs, Futures & the Stock Market | Beginner Course
Financial markets provide the infrastructure through which currencies, shares, derivatives and other financial instruments are exchanged. Before moving into technical analysis, it is useful to understand the main markets, how they operate, and the terminology commonly used when discussing them.
In this lesson: Foreign Exchange • Currency Pairs • Pips & Points • Lot Sizes • CFDs • Futures • Stock Markets
1. What Are Financial Markets?
Financial markets include different marketplaces and trading structures. This lesson focuses on four areas: foreign exchange (Forex or FX), contracts for difference (CFDs), futures, and the stock market. Each works differently and has its own terminology, trading structure and risks.
2. Foreign Exchange (Forex)
What Is Foreign Exchange?
Foreign exchange is the conversion of one currency into another at an exchange rate. Currency values generally fluctuate as supply and demand change. These movements create changing exchange rates between currencies.
What Can Affect Exchange Rates?
Exchange rates can be influenced by economic, political and psychological conditions. The course material highlights government economic policy, trade balances, inflation, economic growth expectations, political instability and conflict, as well as market-participant sentiment.
The Foreign Exchange Market
The Forex market is described in the course material as a decentralised, over-the-counter market. Major trading centres include London, New York, Frankfurt, Tokyo, Hong Kong and Sydney, with transactions taking place across the global trading week.
3. Understanding Currency Pairs
Currencies in Forex are quoted in pairs. The first currency is the base currency and the second is the quote, or counter, currency. The quoted number represents the exchange rate between them.
EUR/USD = 1.20000 → 1 EUR is worth 1.20000 USD
If EUR/USD rises from 1.20000 to 1.25000, the euro has strengthened against the US dollar in this example. A buy position on EUR/USD therefore expresses exposure to a rise in the value of the base currency relative to the quote currency.
4. Pips and Points
What Is a Pip?
A pip is a unit used to express changes in a currency pair. For most Forex pairs in the course material, one pip is represented by the fourth decimal place.
EUR/USD: 1.1050 → 1.1051 = 1 pip
JPY pairs are an exception in the material: the pip is represented at the second decimal place. For example, USD/JPY moving from 150.00 to 150.09 is a nine-pip move.
What Is a Point?
The material also uses the term point, or pipette, for the fifth decimal place in most Forex pairs and the third decimal place for JPY pairs.
10 points = 1 pip
5. What Is a Lot?
Forex position sizes are commonly expressed in lots. A lot represents a specified number of currency units. The course material identifies the following common sizes:
Lot type | Platform size | Currency units |
Standard lot | 1.00 | 100,000 |
Mini lot | 0.10 | 10,000 |
Micro lot | 0.01 | 1,000 |
The monetary value of a pip depends on factors including the currency pair and position size, so the same market movement can have a different financial impact at different lot sizes.
6. Contracts for Difference (CFDs)
CFD stands for Contract for Difference. It is an agreement to exchange the difference in a market’s price between the time a contract is opened and the time it is closed.
With a CFD, the trader does not own the underlying asset. Instead, exposure is taken through contracts linked to the underlying market.
Going Long and Going Short
A long CFD position is opened when taking exposure to a potential rise in the underlying market. A short CFD position is opened when taking exposure to a potential fall.
If the market moves in the opposite direction, the position can incur a loss. Closing the trade involves taking the opposite action to the opening transaction.
LONG → exposure to a rising market | SHORT → exposure to a falling market
7. What Are Futures?
Futures are contracts involving the purchase or sale of an underlying asset at a predetermined future date and price. Underlying assets can include commodities, stocks, bonds, currencies and market indices.
A Simple Futures Example
The course material uses wheat as an example. A buyer might agree to purchase one tonne of wheat in three months at $250 per tonne. The agreed contract price applies even if the market price of wheat changes before the contract date.
Exchange-Traded Futures
On-exchange futures are traded in centralised marketplaces with standardised contract specifications and set expiry dates.
The material gives an example of a 1,000-barrel WTI oil contract: at $70 per barrel, the contract value would be $70,000.
OTC and Forward Contracts
The material describes off-exchange arrangements as over-the-counter or forward contracts. These are negotiated directly between parties and do not have the same standardisation as exchange-traded futures.
This can introduce counterparty risk if one party fails to meet its obligations.
Futures Exposure Through CFDs
The course material also notes that some brokers provide exposure to futures prices through CFDs. In that structure, the client is speculating on the price movement of a futures contract rather than taking physical delivery of the underlying asset.
8. The Stock Market
The stock market is the collection of exchanges and markets where shares in public companies are issued, bought and sold. The course material separates it into the primary market and secondary market.
Primary Market
The primary market is where companies initially issue shares to investors, often through an Initial Public Offering (IPO). The material notes that both institutional and, in some cases, retail investors may participate in new share issues.
Secondary Market
The secondary market is where existing shares and other financial products are bought and sold between market participants rather than directly from the issuing company.
Prices can be influenced by supply and demand, company performance, wider economic data, and political events or headlines.
Stock Market Trading Hours
Unlike the Forex market structure described earlier, individual stock exchanges have defined opening and closing times. Because exchanges operate in different regions and time zones, trading hours vary by market.
9. Investing in Stocks vs Trading Stock CFDs
The final section of the course material distinguishes between investing in shares and trading stock CFDs.
It lists routes such as a stock brokerage account, a Stocks & Shares ISA and workplace arrangements for stock-market participation. It also notes that stock CFDs do not provide ownership of the underlying shares and can be used for both long and short exposure.
10. Key Differences at a Glance
Market or instrument | What it represents | Ownership | Key feature |
Forex | Exchange rate between currencies | Currency-market exposure | Currencies quoted in pairs |
CFD | Price difference from opening to closing | No underlying asset ownership | Can take long or short exposure |
Futures | Contract for a future date and price | Contractual exposure | Standardised exchange contracts may have expiries |
Stocks | Shares in public companies | Share ownership when bought directly | Primary and secondary markets |
Key Takeaways
Forex: Involves exchange rates between currencies, which are quoted in pairs.
Pips and points: Units used to describe relatively small changes in Forex prices.
Lots: Describe Forex position size.
CFDs: Provide price exposure without ownership of the underlying asset.
Futures: Contracts linked to a predetermined future date and price.
Stock markets: Allow shares of public companies to be issued and traded through primary and secondary markets.
Educational Notice: This material is provided for educational purposes only and explains general financial-market concepts. It does not constitute investment advice, a personal recommendation, or an offer or solicitation to buy or sell any financial instrument. Trading and investing involve risk, and product features, market access and trading conditions vary between providers.
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