What Financial Markets Are

A price on a chart is not an opinion, a valuation or a forecast. It is a record. At one moment, someone who wanted to buy and someone who wanted to sell agreed on a number, for a particular quantity, and the venue where they met published the fact. Every technique in this course operates on a series of those records, so it is worth spending twenty minutes on where they come from.

By the end of this lesson you should be able to say what an exchange provides that a private agreement does not, name the main kinds of instrument you might analyse and how they differ, distinguish the market in which a company raises money from the market in which you trade, and give at least four unrelated reasons why the person on the other side of your trade might be there.

Markets, exchanges and other venues

A market is any arrangement that lets buyers and sellers find each other and agree terms. Two neighbours swapping a car for cash are a market. What makes financial markets useful for analysis is that some of them are highly organised and leave a complete, timestamped record.

An exchange is the most organised form. It supplies four things:

A listing process. An instrument is admitted only if it meets published standards — disclosure, minimum size, corporate governance and so on. This is why a listed share comes with a stream of public information and a private company’s shares do not.
A matching mechanism. Orders arrive into a central book and are matched according to published priority rules, normally best price first and, at the same price, earliest order first. Nobody decides who trades; the rules do.
Publication. Trades and quotes are reported. That publication is the raw material of every chart, and of every database you will build in Part 3.
A route to clearing and settlement. A clearing house typically steps between the two sides, so you are not left depending on the creditworthiness of a stranger.

Not all trading happens on an exchange. Depending on the market and the country, a large share of activity can take place on alternative venues, between dealers, or inside a broker that matches two of its own clients. This matters to you in one concrete way: the volume figure on your chart is whatever your data source chose to include, and two vendors can legitimately report different volumes for the same day. Part 2 returns to this when it takes a bar apart.

Exchanges also run to a timetable — a defined session, often with an auction at the open and another at the close, and a holiday calendar. Part 20 shows how much silent damage a misunderstood session boundary can do to intraday work.

What is listed, and what is not

“Instrument” is the neutral word for anything you can hold a position in. They are not interchangeable, and the differences change what analysis is even meaningful.

Instrument	What you hold	Where it usually trades
Ordinary share	A residual claim on a company’s assets and earnings, usually with a vote	Exchange
Exchange-traded fund	A share in a fund that holds a basket of other assets	Exchange
Futures contract	An obligation to exchange an asset at an agreed price on an agreed date	Futures exchange
Option	A right, but not an obligation, to trade at an agreed price	Options exchange
Spot foreign exchange	An agreement to exchange one currency for another	A dealer network, with no single exchange
Bond	A loan to a government or company, with defined payments	Mostly dealer-to-dealer
Contract for difference or spread bet	A contract with your broker that references a price	Not an exchange; the broker is your counterparty

Two consequences follow immediately. First, for instruments that trade on a dealer network rather than a single exchange, there is no single official price: two data providers can show different closes for the same currency pair on the same day, and neither is wrong. Second, some instruments expire or roll — a futures chart that spans ten years is a stitched-together series of separate contracts, and the stitching method changes what your indicators see.

This course uses listed equities as its default, for practical reasons rather than ideological ones: end-of-day equity data is widely available at low or no cost, history is long, and a universe of thousands of symbols is exactly what the screening, ranking and portfolio-backtesting material in Parts 12, 13 and 28 to 32 needs.

Primary and secondary markets

These two words are constantly confused, and the distinction explains something that surprises most beginners.

The primary market is where a security is created and sold by its issuer. A company performing an initial public offering, a government auctioning bonds, a company issuing new shares to raise capital: in all of these the issuer receives the money. The price is set by negotiation and book-building, not by continuous trading.

The secondary market is everything afterwards — investors trading with other investors. When you buy a share, the money goes to whoever sold it to you. The company receives nothing and, strictly speaking, is not a party to the transaction at all.

The life of a listed share

The company needs capitalIt decides to sell part of the ownership rather than borrow
Primary market: issuanceShares are created and sold to initial buyers. The company receives the proceeds
ListingThe exchange admits the share for trading under its rules
Secondary market: tradingInvestors trade with each other. The company receives nothing further
A record of transactionsEvery trade and quote is timestamped and published
The chart you analyseThat record, compressed into bars

Technical analysis lives entirely in the last two steps.

The secondary market still matters enormously to the issuer, because nobody pays a good price in the primary market for something they cannot sell later, and because a company that wants to issue more shares next year is priced off today’s market. But the transfer of money is between investors.

For your database this has a practical edge. A symbol’s history begins on the day it was listed, not on the day the company was founded, and there is no history at all before that. Your universe will contain symbols with twenty-five years of bars sitting next to symbols with twenty days. An indicator that needs two hundred bars simply has no value for the second kind, and a study that quietly drops them has changed the question it is answering. Part 2 treats this properly under survivorship and listing dates.

Who trades, and why

The most common beginner’s model of a market is two people with opposite forecasts, one of whom must be wrong. It is a poor model. The people on the other side of your trades are there for reasons that often have nothing to do with any view about the price.

Long-horizon investors — pension funds, insurers, endowments — are accumulating claims on future cash flows over decades. Much of their trading is driven by money coming in or going out, and by periodic rebalancing back to target weights.
Index funds must hold what the index holds. When an index adds or drops a company, they trade the required amount at the required time largely regardless of price.
Active managers trade on a view, but under constraints: mandates, position limits, sector limits, and the need to explain themselves to clients each quarter.
Short-horizon traders, discretionary and systematic, act on price behaviour over minutes to months. This is the group most of this course’s techniques belong to.
Market makers and liquidity providers quote both a buying and a selling price and hope to earn the difference many times over. Over their holding horizon they are usually trying to be indifferent to direction and to manage inventory. Lesson 3 looks at their economics.
Hedgers are reducing an exposure they already have: a farmer selling a crop forward, an exporter fixing a currency rate, a fund offsetting a position. A hedger will knowingly accept a worse expected price in exchange for less uncertainty.
Arbitrageurs enforce relationships between related instruments — a fund and its holdings, a future and its underlying, the same share listed in two countries.
Corporate actors — companies buying back their own shares, insiders exercising options — trade on a schedule set by boards and lawyers.

Why prices move at all

Mechanically, the answer is short. The quoted price changes when the best available buy or sell order changes, and a new trade prints when an incoming order is willing to meet an existing one. Prices move because orders arrive. Nothing else can move them.

So the interesting question is why the flow of orders changes. There are at least five families of reasons, and only the first is what people usually mean by “news”:

Information. Something becomes known that changes what participants expect the asset to deliver: earnings, a contract, a regulatory decision, an economic release.
The price of risk. Expectations about the asset are unchanged, but what investors demand in return for bearing uncertainty has changed — because interest rates moved, or because appetite for risk did. This repricing can move everything at once.
Liquidity and flow. Someone has to transact for reasons unconnected to value: a fund meets redemptions, a portfolio is rebalanced, an index changes its membership, a position is closed for tax reasons.
Positions and constraints. Stop orders trigger, margin calls force sales, hedges are adjusted, and each of those actions is itself order flow that moves the price further.
Disagreement and updating. Participants do not all process the same information at the same speed or reach the same conclusion, so the adjustment to any new fact is a process rather than an instant.

Notice that categories 3 and 4 involve trades that carry no information about value at all, and that they can be large. That is the strongest reason to take seriously the idea that a record of transactions might contain usable regularities: not every trade is an informed opinion, and the mechanical consequences of flow leave traces. Whether those traces are strong enough, persistent enough and cheap enough to exploit after costs is precisely the empirical question this course keeps returning to.

It is equally important to accept that many moves have no identifiable cause. A financial news site will supply a reason for every day’s action because that is its job, not because the reason was established. Getting into the habit of accepting “I do not know why that happened” is part of the discipline this course is trying to build.

What this means for the chart in front of you

Three things carry forward:

A bar is a compression. One daily bar can summarise thousands of separate transactions made for unrelated reasons. Part 2 shows exactly what that compression discards.
A price is an outcome, not a measurement. It is produced by a mechanism with participants, rules, costs and frictions. Lesson 4 examines that mechanism directly.
“The market thinks” is a metaphor. There is no single opinion in there. There is a stream of orders from participants with different horizons, objectives and constraints, resolved by a matching rule.

Recap

You now have a working account of where the numbers you will analyse come from: an exchange or other venue matching orders under published rules, publishing the result, and clearing the trade. You can distinguish the primary market, where the issuer raises money, from the secondary market, where technical analysis actually operates. You have a list of participant types whose motives differ, and a five-part answer to why order flow — and therefore price — changes at all.

The next lesson follows a single order from your decision to a settled trade, and shows where the gap between the price you saw and the price you got comes from.