5 Asset Classes Available For Trading
Here 5 most common trading instruments:
-
1
Spot trading
-
2
Futures and forwards
-
3
Options (including binary options)
-
4
CFDs
-
5
ETFs and other
Feeling lost in the maze of assets and instruments to trade? Look no further, this article is your financial GPS. We're breaking down the who's who of assets—from Fixed Income and Equities to Forex and Crypto. Choose wisely or risk getting a dent in your returns.
Ever thought about jumping into stocks without sizing up bonds or underestimating the rollercoaster that is crypto? Not advisable.
Zip through this article and you'll miss out on key tips from professional traders with decades in the game,to help you sharpen your strategy.
We've also dive into Real Estate and ETFs too.Knowledge isn't just power—it's profit.
Read on to learn how to invest and unlock your full trading potential!
Do you want to start trading Forex? Open an account on Roboforex!Classes of trading instruments
What is Bond trading?
Think of the fixed income market as the responsible adult in your investment party. It may not be the life of the party, but it gets you home safely.
The fixed income market, or bond market is the sturdy, reliable friend you invite to every social gathering. Here, you're lending money to governments or corporations. In return, you get periodic 'thank you' notes in the form of interest payments, plus your original sum when the bond matures.
If stocks are the daredevils, bonds are the seat belts making sure you survive the ride.
Knowing your bond basics can be your safety net. It’s not glamorous, but it’s essential.
Pros: It's predictable and you generally know what returns you will receive.
Plus, bonds often zig when stocks zag, offering a comfy cushion when equity markets act up.
Cons: Bonds have their quirks too. Interest rates are like their mood swings—the higher they go, the lower the value of your bond. And in a world of low yields and still buoyant inflation, your bond investments might not even keep up with the cost of living.
Capital Allocation: You know that rule about mixing drinks? There's a similar one for portfolios to ensure your portfolio is optimally balanced in terms of portfolio risk.
The "100 minus age" formula. If you're 30, it recommends 70% in equities and 30% in bonds.
What is Stock trading?
The equity market is a dynamic financial arena where investors can acquire company ownership via varied instruments like individual stocks, ETFs, mutual funds, and indexes, each with its unique features and risk profiles.
Want a slice of a company you admire? Stock trading lets you do just that, either on platforms like the NYSE or Nasdaq. By snapping up shares, you're a mini co-owner, with the share price hinging on factors like company performance and market vibes.
You can be a 'turtle'—investing for the long haul to soak in a company's growth and perhaps some dividends. Or opt for quick, short-term trades aimed at snatching profits from market swings. Whether you're in for the marathon or the sprint, strategy is key.
Pros: Investing in stocks offers potentially high returns and capital growth and easier portfolio diversification through different types of stocks or funds, thereby reducing risk. Additionally, liquid markets allow for easy entry and exit.
Cons: Stocks are volatile and susceptible to market fluctuations, geopolitical events, and corporate performance. Understanding nuances,company fundamentals and market trends can be complex.
Capital allocation: Determined mainly by personal risk tolerance and financial objectives.
What is Foreign Exchange (Forex) trading?
The foreign exchange (Forex) market is a global platform for trading currencies, demanding astute strategy and risk management for responsible trading across various instruments like the spot, futures, and options markets.
The Forex market is the world's largest financial market, focused on the buying and selling of currencies. Trading 24/5, offering unparalleled liquidity and the ability to capitalize on market conditions at almost any time.
Most trading volume occurs in the spot market, where currencies are exchanged immediately at the current rate. The futures and options markets provide additional avenues for more advanced traders.
Pros: High liquidity, 24/5 trading hours, and leverage availability makes Forex attractive for quick gains. Spot, futures, and options instruments offer diversified trading strategies.
Cons: Forex trading involves high risk due to leverage and market volatility. The lack of centralized regulation and the complexities of currency pairs.
Capital allocation: For Forex varies significantly based on risk tolerance and investment objectives. Traders with a higher risk appetite may allocate a larger portion of available capital to Forex, but it's crucial to trade responsibly and understand the intricacies of each trade.
What is Cryptocurrency?
The cryptocurrency market may be the rock star of your investment festival. High-energy and unpredictable, offering a show you'll never forget.
The cryptocurrency market is the millennial disruptor in the financial world. A relatively unregulated digital playground of digital coins and tokens, with Bitcoin and Ethereum headlining the show, supported by a myriad of altcoins. Crypto futures and options are available or the more daring.
NFTs: NFTs or Non-Fungible Tokens are unique digital assets verified via blockchain, offering an alternative within the crypto world. It's an adventurous financial ride requiring caution.
Pros: If you’re in for the adrenaline, cryptos offer unprecedented volatility and the potential for enormous returns. 24/7 access for non-stop trading.
Cons: Volatility can bite back. Regulatory concerns, technological issues, and market sentiment can swing prices wildly within minutes.
Capital allocation: For those who can stomach the rollercoaster, a small allocation, often 5-10% of your portfolio, adds high-octane fuel to your overall returns. Invest only what you can afford to lose.
What are Commodities and its instruments?
Commodity trading offers an opportunity to diversify your portfolio by investing in real-world, tangible assets.
The commodities market is vast, split mainly into metals (think gold, silver), energies (oil, natural gas), and agriculture (soybeans, wheat). Each category has its quirks.
Metals often act as a hedge against inflation; energies can swing wildly based on geopolitical events, and agriculture is susceptible to weather patterns.
Pros: Commodities offer diversification and a potential buffer against market volatility and ample opportunities for speculative gains.
Cons: Unpredictable variables, from climate change to political instability, making it riskier and requiring a deep understanding of each commodity's idiosyncrasies.
Capital allocation: Typically around 5-10% of portfolio value.Sufficient to capture potential benefits without exposure to excessive risk. If you're keen to diversify commodities might spice up your portfolio.
What about Real Estate trading?
Whether you're investing in bricks or trusts, real estate offers unique ways to grow your cash.
Real estate provides two primary avenues: direct property ownership and Real Estate Investment Trusts (REITs).
Direct ownership allows you to manage assets and reap the benefits of property appreciation and tax incentives. However, it's capital-intensive and requires ongoing management.
REITs offer a more hands-off approach, providing steady income via dividends as mandated by law to distribute 90% of taxable income. Investors don't enjoy the same tax benefits as direct ownership.
Both routes can be capital-intensive, especially direct ownership which requires significant upfront costs, and possibly, mortgage commitments.
5 types of trading instruments
Here we will highlight the 5 most common trading instruments used by retail investors and expand to provide ample clarity!
What is Spot trading?
Spot trading offers immediate execution for those who want to seize the market at its current price.
The spot price is the rate for buying or selling an asset right here, right now.
Regardless of the asset, the spot price is your "market sticker price" for immediate transactions.
Pros: Instant gratification. You see a price you like, you lock it in immediately. It's also straightforward, with no need to navigate complex derivatives or worry about future market conditions.
Cons: The full amount of capital is required, and the market volatility could make or break your trade within seconds, pending your strategy.
What are Futures and Forwards?
Futures and Forward contracts are your financial crystal balls, providing a sneak peek into the future price of the asset.
Futures are standardized contracts traded on exchanges to buy or sell an asset at a predetermined price, on a future set date..
Forwards are similar, but are private agreements, so they're more customizable.
Pros: Futures provide leverage, meaning you have increased asset exposure for a fraction of its price. Both contracts are used as hedging instruments against price volatility.
Cons: High leverage means high risk. You could lose more than your initial investment. As forwards are not standardized, counterparty risk is involved.
What are Options?
Options are the Swiss Army knife of the financial world, versatile tools that let you flex your risk and reward in multiple scenarios.
Options are contracts that give you the right, but not the obligation, to buy or sell an asset at a fixed price before a certain date.
Pros: They offer flexibility and multiple strategies like hedging or leveraging. Your losses are capped at the price you paid for the option.
Cons: On the flip side, options can expire worthless, involve various fees and can be complex to understand initially.
If you enjoy strategic financial plays, options could be your new best friend. Remember, with great power comes great responsibility.
“Binary Options”, referred to as gambling by professional institutional traders, involves predicting whether an asset's price will rise or fall within a specific time frame. If you're right, you pocket a fixed return; if wrong, you lose your stake. Simple as that!
What are CFDs
Contracts for difference are the financial world's equivalent of a speed date—quick, exciting, but potentially risky.
CFDs allow you to speculate on price movements without owning the underlying asset.
Pros: They offer high leverage and the ability to go long or short, meaning potential profits from both rising and falling markets.
Cons: Leverage amplifies gains and magnifies losses.Plus overnight financing costs. If you like quick plays and understand the risks, CFDs might be your match.
What are ETFs, Index Funds and Mutual Funds?
These are the financial market's ‘all-you-can-eat buffet’, serving up diversification with a side of risk management.
ETFs (Exchange-Traded Funds) are the food trucks of investing—accessible and flexible, allowing you to buy and sell throughout the trading day.
Mutual Funds are your fancy, sit-down dinners—higher fees, but potentially tailored to your tastes.
Index Funds are the budget-friendly cafeterias—minimal fuss and low-cost exposure to market indices.
Pros: These funds offer diversification, professional management, and varying levels of risk to suit your investment style.
Cons: They come with fees. Also, unlike individual stocks, you won't get voting rights.
Tips to choose the instrument for trading
Choosing the right asset class and trading instrument is like dating—know your type and what you're willing to commit to for a potentially fruitful relationship.
Navigating the equity markets requires a self-aware approach. First, assess your strengths and weaknesses.
If you're a whiz at derivatives, perhaps options trading is your lane. More of a “tortoise than hare”? Bonds or mutual funds might suit you.
Weigh the advantages and disadvantages of each asset class. While stocks offer potentially high returns, they come with volatility.
Forex trades almost around the clock, but it's not a playground for the risk-averse.
Mind the costs—commissions and fees can nibble at your profits. And consider trading hours; if you're a U.S.-based night owl, the Asian markets could be your arena.
Your trading IQ matters. If terms like "stop-loss" or "trailing stop" sound alien, hit the books before hitting “buy”.
As exhilarating as trading is, risks lurk. Exercise caution and robust risk management. Remember, you're in a real-money game, not playing with Monopoly cash.
Best Forex brokers 2024
FAQs
How to start trading financial instruments?
You'll need to open an account with a reputable financial market brokerage. That's your gateway to trading everything from Forex and Equities to Commodities. If cryptocurrencies caught your eye, set up an account at a dedicated crypto exchange. Once you're set up, it's all about picking your battles—or in this case, assets—and making your move.
Remember, trading is not a sprint; it's more like a marathon with hurdles.
What is the easiest financial instrument to trade?
The "easiest" financial instrument to trade can be a bit subjective and varies based on your skills and appetite for risk. Some find Forex manageable because of its 24/5 market hours, while others feel at home with blue-chip stocks.
There's no one-size-fits-all answer. Do your homework, test the waters, and find what works with you.
How do I incorporate risk management into my trading?
Think of it as your financial seatbelt. Always predetermine your exit strategy and never risk more than a small percentage of your portfolio on a single trade. Use tools like stop-loss orders to limit potential losses. This isn't just cautious—it’s how pros stay in the game. Remember, the market has no mercy; protect your assets!
How do professional traders succeed?
Trading is less about rolling the dice and more like playing a high-stakes chess game. Pros don't just jump in; they have well-defined strategies, backed by meticulous research and risk management.
They're not chasing quick wins; they're playing the long game. Setting stop-loss limits, diversifying assets, and sizing positions are second nature to them.
Patience? That's their middle name. They know markets have moods and they wait for the right moment to make their move. So, if you're serious about this, ditch the gambler's hat. Sustainable trading is a marathon, not a sprint.
Glossary for novice traders
-
1
Broker
A broker is a legal entity or individual that performs as an intermediary when making trades in the financial markets. Private investors cannot trade without a broker, since only brokers can execute trades on the exchanges.
-
2
Trading
Trading involves the act of buying and selling financial assets like stocks, currencies, or commodities with the intention of profiting from market price fluctuations. Traders employ various strategies, analysis techniques, and risk management practices to make informed decisions and optimize their chances of success in the financial markets.
-
3
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.
-
4
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.
-
5
CFD
CFD is a contract between an investor/trader and seller that demonstrates that the trader will need to pay the price difference between the current value of the asset and its value at the time of contract to the seller.
Team that worked on the article
Mr. Walsh commenced his career within Interbank Capital markets in Johannesburg in 1990 broking USDDEM as well as USDZAR spot and forward FX with the worlds leading interbank broker M.W. Marshalls of London, now ICAP Pte. Ltd. Shortly after a stint in London, he was offered a role at the same firm in the Singapore office in early 1993, where he was a leading broker in Asia on the USDSDEM desk.
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).