How To Choose An Asset For Trading

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When choosing which asset to trade, you should consider: costs and fees, your trading style, economic factors and liquidity and volatility.Conduct thorough research to enhance your understanding of the chosen asset, commence with small capital, especially if you're a beginner, to manage risks effectively, and adopt a patient, long-term strategy, recognizing that trading is not a get-rich-quick scheme.

From trading in global foreign currency exchanges to investing in the business world through the stock market, there is an abundance of choices of financial assets to engage with as a trader. The hard part is knowing which asset is best for you.

In this article, Traders Union will be taking a brief look into five of the most popular financial instruments available for trading. We’ll break down the most important advantages and disadvantages of trading each asset class, look at what factors to consider when choosing an asset to trade.

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Types of financial assets in trading

Financial assets are categorized into groupings based on the characteristics that they exhibit and the laws and regulations to which they are subject. Brokers and traders may trade in multiple asset classes, or choose to specialize in just one. Each asset class has its own strategies for trading, market hours, and risk factors.

It's essential for traders to understand the unique dynamics of each asset class, to enable them to make informed decisions and navigate the specific challenges associated with their chosen financial instruments. Whether dealing with stocks, forex, cryptocurrencies, or other assets, a tailored approach is crucial for success in the dynamic world of financial markets.

We’ll be looking at the following financial assets:

Forex;
Stocks and ETFs;
Futures;
Crypto;
Options.

Forex

Forex trading is the exchanging of one currency for another currency in order to profit from the difference in exchange rates. Currencies are traded against one another in the form of currency pairs, on international exchanges with no centralized marketplace. The market is open 24 hours a day from Sunday to Friday, with traders and investors of all sizes participating.

High liquidity. As one of the most liquid markets globally, forex provides ample trading opportunities.
Accessibility. As forex markets operate 24 hours a day, five and a half days a week, traders can engage at almost any time. This is not the case with an asset like stocks.
Low costs. The absence of exchange fees and low spreads make trading forex one of the more cost-effective forms of market engagement.
Profitability. Forex brokers offer leverage, enabling traders to control a larger position with a smaller amount of capital.

Fraud risk. It's essential to conduct thorough research and only trade with reputable brokers regulated by credible financial authorities.
Economic sensitivity. Forex is highly sensitive to economic indicators, making it more vulnerable to economic downturns compared to some other assets.
Complex fundamentals. As forex relies heavily on economic factors and fundamental analysis, it can be more intricate and complicated for traders who may prefer more straightforward technical analysis.
Limited asset variety. Though there are many currency pairs, there are far fewer diversification options compared to other asset classes like stocks or commodities.

Stocks and ETFs

Stocks are assets that represent a piece of ownership in a publicly traded company and are traded on various stock exchanges around the world. There are tens of thousands of stocks in existence, some worth pennies and others worth hundreds or thousands of dollars.

ETFs, meanwhile, are bundles of assets and securities such as stocks and bonds. Stocks and ETFs can be traded during the market hours of whichever stock exchange they’re listed on, and many even distribute profits to investors in the form of dividends.

Diversity. Stocks and ETFs represent various sectors, providing opportunities to invest in industries ranging from technology to healthcare, allowing for diversified portfolios.
Long-Term. Stocks have historically shown the potential for long-term capital growth, making them suitable for investors with more long-term financial goals.
Liquidity. Many stocks and popular ETFs are highly liquid, enabling traders to easily buy and sell positions without the price being significantly impacted.
Active or passive investing. Investors can choose between active stock picking or passive investing through ETFs, catering to various investment styles.
Ownership and dividends. Owning stocks means owning a share of a company, giving you access to dividends and potential voting rights at shareholder meetings.

Market volatility. Individual stocks can be subject to significant price fluctuations influenced by news specific to the company, earnings reports, or broader market conditions.
Research intensity. Successful stock trading often requires in-depth research into individual companies, financial statements, and market trends, demanding significant time and expertise.
Expense ratios. ETFs have expenses that can erode returns over time, especially for high-frequency traders.

Futures

Futures are contracts between a buyer and seller (who are not known to each other) to buy or sell an asset at a predetermined price and pre-set time in the future. They are a form of derivative, with the price derived from the value of an underlying asset. Futures contracts can be derived from various asset classes, including stocks, commodities, and forex. They are traded on futures exchanges by brokerages, such as the CME group, which are open almost 24 hours a day, five and a half days a week.

Lower transaction costs. Futures trading often involves lower transaction costs compared to trading the underlying assets directly.
Speculative opportunities. Futures markets offer ample opportunities for speculators to capitalize on price movements without physically owning the underlying assets.
Tax advantages. Depending on the jurisdiction, futures trading may offer tax advantages compared to trading other assets.
Diversification. Trading in futures offers portfolio diversification in a way that stocks and ETFs can’t, by offering direct market exposure to underlying commodity assets instead of secondary market products like stocks.

Expiration risk. Futures contracts have expiration dates, and traders need to manage or roll over positions before those dates, adding complexity and incurring potential costs.
Limited asset variety. While futures cover various asset classes, the range may be limited compared to the entire catalog of financial instruments available for direct trading.
Complexity. Futures markets can be very complex, requiring a good understanding of market dynamics, contract specifications, and various trading strategies.

Crypto

Cryptocurrencies are digital currencies traded on a decentralized system using cryptography (essentially encrypted information), that also serve as an alternative form of payment. The cryptocurrency market, which has no centralized authority and is run across a huge network of computers, is the youngest of all financial markets, meaning that legal bodies and financial regulators are still figuring out how to regulate it.

24/7 Market. Cryptocurrencies trade 24/7, 365 days a year and are the only financial asset to do so. This provides flexibility for traders in different time zones and allows continuous trading.
Lower entry barriers. Cryptocurrency markets generally have lower entry barriers than other financial markets, enabling participation with smaller capital.
Innovation and technology. The crypto space is dynamic, with continuous technological advancements and innovative projects. Investors can explore innovative blockchain projects and Initial Coin Offerings (ICOs) for potential growth.

Volatility. Cryptocurrencies are known for their high volatility, leading to rapid price fluctuations.
Lack of regulation. Compared to other assets, cryptocurrencies often operate in a less regulated environment, posing additional risks.
Market sentiment. Cryptocurrencies can be heavily influenced by market sentiment and speculation. For example, price action on coins like DOGE is said to be based purely on sentiment.

Options

Options can be traded over-the-counter electronically or directly on the exchanges of the assets they are based on. Traders can buy and sell options for many assets, such as stock options, forex and commodities. They can usually be traded almost 24 hours a day, Sunday to Friday.

Versatile. Options can be used in various strategies, from speculation to hedging existing positions.
Diverse markets. Options are available on a wide range of assets, providing flexibility for different market conditions.
Adaptability. Options can be used in various market conditions, whether bullish, bearish, or neutral.

Limited time. Options contracts have expiration dates, so if the market doesn't move as expected within the timeframe, the option may expire worthless.
Continuous monitoring. Options require active monitoring, and unexpected market moves can impact the value of the position.
Costs. Commissions and fees associated with options trading can accumulate, affecting overall profit profitability.

Best Forex brokers

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Review

Plus500 is an international fintech holding that offers CFD and options trading worldwide through its network of branches, as well as futures trading in the U.S. The company was established in 2008 in the Israel. It is regulated by the FCA, as well as by 9 financial supervisory authorities in other countries, such as CySEC (Cyprus), ASIC (Australia), MAS (Singapore), FSCA (South Africa), among others. Plus500 is listed on the London Stock Exchange (ticker: PLUS) and is part of the companies that make up the FTSE 250 stock index. Plus500 is a reliable intermediary for accessing financial markets, used by over 25 million traders worldwide.

Pros/Cons

•Multi-regulation — licensed in 10 countries;

•Wide range of trading instruments — over 2800;

•Highly functional trading platforms — browser and mobile versions;

•Transparent pricing model — Spreads and Additional fees;

•Automatic adjustment of trading conditions to meet regulatory requirements;

•Provision of educational content, free analytics, and demo accounts;

•Customizable trading alerts — both on the platform and through external communication channels.

•Lack of Micro or Cent-type accounts in its account lineup, which allow trading with minimal risks and investments;

•The Plus500 platform does not support automated trading;

•Some popular trader strategies are prohibited.

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Minimum deposit:

Deposit Bonus:

Regulation:

ASIC, FCA, DFSA, BaFin, CMA, SCB, CySec

Review

Pepperstone (Pepperstone.com) was founded in 2010 in Melbourne, Australia, by professional traders who were not satisfied with the quality of services provided by most brokers. The founders decided to avoid many of the disadvantages of competitors, including high commissions, delayed execution of orders, etc. The founders therefore focused on improving the technical component. The company has set itself the goal of changing the “rules of the game” and setting the bar high for online trading.
Today, Pepperstone offers clients all over the world some of the best technological solutions and favorable trading conditions. The company also provides professional tools that help traders not only master the fine art of trading, but also significantly increase trading efficiencies. In addition, Pepperstone’s platform is scrutinized by seven regulatory authorities, including ASIC (Australian Securities and Investments Commission, AFSL No.414530), FCA (UK Financial Conduct Authority, 684312), DFSA (F004356), BaFin (151148), CMA, SCB (SIA-F217), and CySec (388/20). Moreover, with Pepperstone, clients' assets are maintained in aggregated accounts with several major, global banking institutions. These facts confirm the reliability of the company and guarantee the safety of the client's capital.

Pros/Cons

•Attractive trading conditions;

•Fast order execution - 30 ms on average;

•1,200+ trading instruments;

•Low fees; and

•No inactivity fee.

•Support service works only 24/7;

•No cent account;

•Not available to US clients;

•Limited passive trading opportunities;

•Limited analytical materials available on the site. The only way to resolve this issue is to connect to trading signals;

•No news section; and

•Demo accounts can only trade for free for 60 days.

Factors to consider when choosing an asset

When choosing a category of assets or a specific asset to trade, you should consider several factors. Let’s take a look at them.

Fees or costs. Different financial instruments can come with additional costs and fees, which may be transactional or ongoing fees. High fees can eat into profits so it’s preferable to choose assets with low or no transaction costs. For example, the bid-ask spread in a trade is considered a transactional cost, or overnight fees for holding stock positions with leverage are ongoing fees. Some assets such as forex or indexed ETFS offer low spreads and no transaction costs, while many derivatives carry high fees.
Trading style. Align your asset with your preferred trading approach, whether it's day trading, long-term investing, or swing trading. The behavior of the chosen asset, as well as its market hours, will impact how effectively you can trade using your approach. For example, a day trader might find a forex pair such as EUR/USD attractive due to its intraday volatility. However, a long-term investor may favor a dividend-paying stock like Johnson & Johnson.
Liquidity and volatility. Assess how easily you can buy or sell an asset (liquidity) and the level of price fluctuations (volatility). Highly liquid assets like Apple Inc. (AAPL) stocks offer ease of trading, while volatile assets like Bitcoin (BTC) appeal to those prioritizing significant price movements.
Economic factors. Each asset class is affected by economic factors to different degrees. Make sure to understand how economic conditions influence your chosen asset class. For example, forex traders should monitor economic releases such as payroll data for the U.S. dollar, while crypto traders need to follow geopolitical events and inflation.

Tips for choosing an asset to trade:

Consider these additional tips when narrowing down your asset selection:

Research. It’s essential to learn as much as you can about the asset you are considering trading. The more you know, the more successful your trading will be.
Start small. Don’t risk more than you can afford to lose. Particularly if you are a beginner, start with small amounts of capital while you are learning the ins and outs of trading your chosen asset.
Be patient. A lot of trading is about playing the long-term game. It is not a get-rich-quick scheme, so approach it with a strategy in mind for the long-run.

Conclusion

Choosing an asset for trading requires careful consideration of your risk tolerance, trading style, and investment goals. Diversification, technical analysis, fundamental analysis, and staying informed about market events can help you make informed asset selection decisions. Remember, there is no single "best" asset, and the optimal choice depends on your unique circumstances and trading approach.

FAQs

Which asset is best for trading?

This depends on your trading style, risk tolerance, and what fees and costs you are willing to incur. Stocks are the most popular asset.

What is the safest asset to trade?

The safest asset to trade depends on your individual risk tolerance and investment goals. However, some assets are generally considered to be safer than others. They are: Government bonds, blue chip stocks, treasury bills.

What are the riskiest assets?

Commodities and certain currencies are widely considered the riskiest investments, as are many cryptocurrencies.

What assets do day traders trade?

Stocks are the most popular assets for day traders. They also trade bonds, options, futures, commodities and currencies.

Team that worked on the article

Jason Law is a freelance writer and journalist and a Traders Union website contributor. While his main areas of expertise are currently finance and investing, he’s also a generalist writer covering news, current events, and travel.

Jason’s experience includes being an editor for South24 News and writing for the Vietnam Times newspaper. He is also an avid investor and an active stock and cryptocurrency trader with several years of experience.

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Dr. BJ Johnson is a PhD in English Language and an editor with over 15 years of experience. He earned his degree in English Language in the U.S and the UK. In 2020, Dr. Johnson joined the Traders Union team. Since then, he has created over 100 exclusive articles and edited over 300 articles of other authors.

Mirjan Hipolito is a journalist and news editor at Traders Union. She is an expert crypto writer with five years of experience in the financial markets. Her specialties are daily market news, price predictions, and Initial Coin Offerings (ICO).

Day trader

A day trader is an individual who engages in buying and selling financial assets within the same trading day, seeking to profit from short-term price movements.

Volatility

Volatility refers to the degree of variation or fluctuation in the price or value of a financial asset, such as stocks, bonds, or cryptocurrencies, over a period of time. Higher volatility indicates that an asset's price is experiencing more significant and rapid price swings, while lower volatility suggests relatively stable and gradual price movements.

HFX

HFX trading likely refers to high-frequency forex trading, where automated algorithms execute a large number of trades at extremely high speeds.

Leverage

Forex leverage is a tool enabling traders to control larger positions with a relatively small amount of capital, amplifying potential profits and losses based on the chosen leverage ratio.

Options trading

Options trading is a financial derivative strategy that involves the buying and selling of options contracts, which give traders the right (but not the obligation) to buy or sell an underlying asset at a specified price, known as the strike price, before or on a predetermined expiration date. There are two main types of options: call options, which allow the holder to buy the underlying asset, and put options, which allow the holder to sell the underlying asset.

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