The financial market has brought together millions of users from all around the world united to trade a wide range of financial instruments. Being the largest market in the world, it offers miscellaneous financial instruments to trade, where the user takes advantage of the price movement and thus making profit upon the correct predictions.
There are 5 different categories of financial instruments: Forex, Equities, Commodities, Bonds, and Indices. Given the variety, there are lots of small details to consider before one starts trading.
What to Consider?
Given the complexity of the market, there are specific traits for every financial instrument which needs to be considered before one starts trading. These care:
- Liquidity, which refers to how easily accessible is the object of trade at any given time. This means that instruments with high liquidity are easier to trade since once can enter and exit the market with ease.
- Transaction costs are good indicators of how well the financial instrument will allow generating returns on any given trade. The lower the transaction costs, the better. There are fees associated with trading since brokerages charge their own fee. The less this is the better the returns.
- Volatility is the ability of the financial instruments to rise and fall sharply. This means that whoever knows what they are doing can turn a profit multiple times, while small mistakes may result in bigger losses.
- Information Availability is the flow of information. It is important since trading is directly affected by how informed the decisions of trader is, due to the simple fact that on-going news and events affect the prices of instruments, thus, the more available the information is the better the outcome will be. For example, in March 2020, the price drop of crude oil due to coronavirus pandemic has resulted in the soaring of Yen and Swiss Franc.
Foreign Exchange Market or Forex, is one of the largest markets out of all with the best financial instruments available at hand for traders. Some of the most common trading instruments are currency pairs of biggest economies like EUR/USD, GBP/USD, USD/CHF, as well as cryptocurrency, and so on.
Forex instruments offer one of the best options to trade with since they are stable and available at any given time, which means that one can trade with them regardless of jurisdiction all around the clock. Forex brokers usually provide significant amounts of leverage, which means that the traders can place trades that their capital allows.
It is also important to note that a lot of people are using foreign brokers to get the best bang for the buck since a lot of South African Forex brokers to provide exactly the same service as local American or European brokerages for much cheaper prices. This in turn gives a small profit, which if done correctly and for an extended period of time results in significant gains.
It is also worth noting that one should be careful with exotic currency pairs as they lack liquidity and sometimes availability as well. Although same African brokerages usually offer to trade in such pairs as well. In general, brokerages also tend to charge more for such pairs so out of country options are becoming more appealing due to lower fees.
Individual Equities are another financial instrument. Instead of finding a profit through indices or currency pairs, one can start trading stocks of the companies as well. Owning stocks means that one becomes a partial owner of the company depending on how many shares he/she has. Stocks are popular mostly due to the fact that they come with high levels of liquidity. Volumes of trade and volatility differ from day to day, which means that traders usually take advantage of the slight price movements to squeeze in the profit.
The most popular stocks are that of the biggest companies like Microsoft, Amazon, Google, and etc. These provide very high levels of liquidity and volatility. However, it’s important to understand that ongoing news in the industry affects the prices of these stocks heavily.
Some of these companies, due to their size, may get into some kind of a scandal, which causes their stock prices to drop or could come up with a cutting edge new piece of technology, which raises the stocks through the roof. It is important to pay close attention to what is going on in the industry to make sure that the most profit is gained via trading.
Other things that affect the stocks are Analyst’s stock ratings. These are in-detail analysis of company shares to provide recommendations on how to trade with them. Such reports usually trigger price changes.
There are different types of commodities. They are classified into 5 different categories: agricultural commodities like livestock and meat, energy, precious metals, and industrial metals. The trading is done using futures contracts on exchanges.
Metals are gold, silver, platinum, and copper. Energy assets are crude oil, natural gas, and gasoline. Livestock and meat category is – as the name suggests – cattle feeders, pork bellies, and lean hogs. The agricultural sector trades corn, soybeans, wheat, rice, coffee, and etc.
In this market supply and demand are everything. For example, as of now, the price of crude oil has fallen to one of the all-time lows. This is due to the fact that the global pandemic has caused less movement all around the world including airlines. Thus, the demand for oil has fallen, while there is a surplus of the supply. It is estimated that during June and July the pricing will be $20 a barrel.
Gold is one of the most popular commodities to trade with. This is due to the fact that it’s more stable than almost any other commodity and provides reliable and dependable value overall.
Agricultural products such as corn are good to trade during the summer as well as population growth periods which directly impact the demand, therefore, triggers price swings.
Stock Indices showcase the performance of the sections of the stock market. They usually list stocks of companies from the given section of the market usually based on their market cap. Prices of these stocks are compared with each other so that the investors have a better understanding of returns of investments.
A stock index represents the performance of the whole country’s economy or even the entire world’s stock market. S&P 500 is one of the most pronounced financial instruments under this category.
It includes stocks of around 500 companies and due to the sheer amount of information presented in this index it becomes a good indicator of the movement, which happens either in the U.S. or the world since the United States companies usually impact the stocks of other firms around the globe.
It is also important to note that the S&P 500 accounts for around ¼th of the whole financial market of the United States, which makes it a very strong financial instrument to trade with.
Some of the other honorable mentions go to The Wilshire 5,000, which lists 5,000 companies that are very diverse and takes into account all of these stock prices to compute the rating. German DAX index is also a very good option as well as Nikkei 225 of Japan and FTSE 100 of Great Britain.
Exchange-Traded Funds and Government Treasures
The last in our list of financial instruments is Exchange-traded funds (ETF) and government treasures also known as Bonds. ETFs are investment funds, which track the performance of sector indices, commodities, or bonds.
ETFs cover a range of traded assets including but not limited to bonds, currencies, real estate, commodities, and etc. A trader buys shares to a portfolio, which replicates the performance of a given asset.
ETFs are bought and sold on margins. They have a reduced risk because they track the performance on indices, provide diversification and trade is done on the difference of value due to fluctuations in prices. Some of the popular and biggest ETFs are SPDR S&P 500 (ARCA: SPY), PowerShares QQQ Trust (NASDAQ: QQQ), Russell 2000 Index Fund (ARCA: IWM), and etc.
Government treasuries are also one of the safest financial instruments, due to the fact that they have myriads of safety mechanisms when it comes to risks. No other financial instrument has any guarantees except for bonds. This is why they are one of the most popular investment assets for income-oriented investors. Government treasuries also have their classification.
- T-Bills take 4 to 52 weeks to mature. This is the lowest time for government treasuries.
- T-Notes take anywhere from 2 years to 10 years to mature. This is called middle-range government bonds.
- T-Bonds are for long-term investments as they take up to 30 years to mature
As we already saw, Financial Market provides a lot of different opportunities for traders starting from currency pairs to government treasuries to invest in. This creates a space where anyone can freely trade and utilize their funds no matter the size of their capital. Due to this, it’s important to get to know exactly what type of financial instrument one wants to invest in, which depends on myriad factors associated with individual traders.
It is important to note that while financial markets provide huge opportunities for profit they also provide the same for losing money. Understanding each financial instrument and choosing a correct one is a sure way to go.