Owing to the economic consequences of the coronavirus (COVID-19) pandemic, 2020 has been a turbulent year for financial markets and other investments. March 2020 saw some of the steepest drops on stock markets in recorded history – for example, the Dow Jones Industrial Average in the United States recorded its three largest falls ever (measured in points) during the month. Since then share prices have somewhat recovered, albeit in a patchy and inconsistent manner owing to differing governmental responses, and the different ways businesses were affected by the pandemic. For example, the Dow Jones also reached record heights in 2020, fueled by fiscal stimulus measures directed at providing liquidity to the corporate sector, and its inclusion of sought-after stocks like Apple. Meanwhile, other indexes such as the FTSE are well behind their pre-corona peaks. Bond markets have also been especially hard hit, with many European government bonds having yields below zero for much of 2020.
By far the two largest stock exchanges in the world are the NYSE and the NASDAQ – both located in New York. City. Taken together, the value of the shares listed on these two exchanges had a combined market capitalization of over 36 trillion U.S. dollars – more than the next eight-largest stock market operators combined. The next three largest stock exchanges are located in East Asia, followed by the two major European stock exchange operators (Euronext and the LSE Group).
Stock exchangesThe two most prominent financial instruments are equities and bonds. Equities (or shares) are the ownership of a portion of a company, which can then be traded. The value of this portion may fluctuate depending on the company’s performance and market conditions, making equities a potentially risky investment. Bonds differ in being a low-risk, fixed price investment where a company or government receives an amount of money to be repaid after a certain period, along with regular interest payments.
Exchange traded fundsEnvironment, Social and Corporate Governance (ESG) reflects the environmental and social impact of an investment. Two main factors are driving the growth of ESG investments. First, is concern over the climate crisis, with many investors worrying that consumer sentiment will turn against companies who are not environmentally responsible. Second, is changing attitudes toward many social issues, such as worker conditions, community investment and support for diversity and inclusion.
Ethical investments in EuropeWhile the two largest stock markets in the U.S. – the NASDAQ and the NYSE – have far larger market capitalizations than any other stock exchange, looking at trading volumes narrows the gap significantly. While still the two largest stock exchanges with 16 and 14 billion U.S. dollars of stock traded in 2019 respectively, fourth-placed Shenzhen Stock exchange is not far behind at 11.5 billion U.S. dollars. Based on trading volumes, U.S. markets top the list, followed by East Asia, then Europe.
Dow Jones Industrial AverageIn addition to stocks, investors often choose to trade bonds on financial markets. Bonds offer a low risk, stable return, with the issuer paying periodical interest then the original amount upon ‘maturity’. For this reason bonds are often traded before maturing, effectively allowing investors to lock in a secure interest rate. If investors expect interest rates to fall it makes sense to purchase existing bonds, but if rates rise then investors lose out as new bonds issued have a higher return.
International bond marketThe primary goal of investing in financial instruments and is the efficient allocation of monetary resources within a capitalist economy. Such investment on an open market allow people with excess financial resources to give these funds to businesses or individuals who need them, with the promise of some kind of return for their investment. A variety of different financial instruments are used to achieve this, such as shares, bonds, currencies and derivatives (which effectively bet on the future price of a commodity or financial asset).
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