Trading Instruments

Trading Instruments

If you’re unsure what trading instruments are, we’re here to help.

Things You Need To Know About Trading Instruments Before You Invest

If you’re unsure what trading instruments are, we’re here to help. You might have heard traders talk about securities in the past. Well, those are trading instruments! In short, trading instruments are various types of markets that allow you to trade. That includes the stock market, the financial market, commodity futures, etc.

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What Are Financial Trading Instruments?

If you’re looking to get into the financial trading market, you have plenty of options.
But what are the most well-known financial trading instruments?

Currency Pairs (Forex Trading)

On the very top of the financial trading instruments list is definitely the foreign exchange market. It’s not only stable but also available all day, making trading within your reach whenever you want. It’s also the largest financial market in the world, with a daily volume of 5 trillion dollars. Forex includes trading currency pairs. Turning a profit on currency pairs means quoting two currencies against each other and betting on their exchange rate.

CFDs on Commodities

CFDs are contracts between the service provider and the trader where they agree on specific conditions in the present and then are bound by the agreement to meet those conditions at a particular date in the future. CFDs are contracts that deal with the difference in price, which is how traders turn profits with them. No actual commodities exchange hands; the traders imply “bet” on the final price of a specific commodity.

CFDs on Indices

CFDs on indices are contracts that traders make that speculate on the price change of a specific index. Traders can bet on the price going both up and down. Indices are collective stocks from a specific bundle of companies. That makes them safer for trading, given that the price of the index (that the trader is speculating about) isn’t dependant on one company but on a whole bundle of them. That technically means the trader can’t move with the market and alongside major companies.

Stock CFDs

Similar to CFDs on indices, stock CFDs allow traders to speculate on the price of the stocks without taking ownership of the underlying assets. However, with individual stocks, the traders tie their trades to one company and have to pay close attention to macro and micro factors that could potentially endanger it.

Cryptocurrency CFDs

Contract of difference is a popular form of crypto trading. Since cryptocurrencies are slowly but surely taking their rightful place in the financial market, it’s no wonder that traders are turning to them as an alternative for CFD trading.

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Factor to Consider Before Investing

Liquidity

Liquidity of the financial instrument refers to how easy it is to quickly sell or buy assets on a particular market. Trading with a high liquidity instrument means that you can easily both sell and buy assets (even in large amounts) and still get a fair price.

Volatility

Volatility indicates how fast the price changes. A volatile instrument is the one that is ideal for frequent traders who are looking to turn a profit more than once on a particular move.

Transaction Costs

Since the whole point of trading is to make a profit, picking financial trading instruments with low transaction costs is wise. If you want to trade often or at high frequency, this is something you need to think about when picking an instrument.

Information Availability

The prices depend on a lot of things but most of all information. You need quick and easy access to data about economic and political changes, market movements, and other factors that might cause the price to go up or down. Not all financial instruments can provide the necessary levels of information availability.

Trading Instruments

Top 5 Trading Instruments

Forex

Forex practically has it all. It's a relatively stable market which isn't an easy feat. However, it's also a highly liquid market. Traders can enter it without any trouble and, since the volatility is also high, they can make frequent trades and turn a profit. Not to mention, Forex brokers will almost always offer a good leverage to traders.

Stock Indices

Stock Indices show us how the overall market is performing. Based on that, we can predict its movements and make our trades. The indices are an insight into specific companies' stock price. The index price is also weighted which makes comparisons and predictions easier.

Equities

Trading individual stocks or equities is different from the rest because the trader actually owns the underlying asset. Stocks are liquid and volatile which allows traders to make their moves on a daily basis.

Commodities

Trading commodities means trading for a profit. The commodities market is different because the prices are determined by the supply and demand. Based on them, traders can guess the price movement.

ETFs

ETFs or bonds track performance. However they focus on a specific sector (in both indices and commodities trading). These financial trading instruments come with a safety net, which makes them particularly appealing to traders (especially beginners).

Is There an Ideal Instrument to Trade?

There are no cure-all financial instruments out there. At the end of the day, it’s all about what you need and expects from trading. Of course, the financial instruments you go for also depend on the amount of capital you have. Trading with government bonds and with Forex requires different types of investments.

It’s also vital that you determine what type of trader you want to be. For example, if you’re more interested in day trading, you need instruments that don’t carry over the positions into the next day. What’s more, you also need those that are highly volatile and have low transaction costs. So, for example, it’s better to go for Forex instruments than for bond futures.

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