In the simplest of terms, trading instruments are the diverse types of assets you can trade, also known as securities. The instruments came in different forms where some are cash instruments while others are derivatives, all of which allow you flexibility into the trade. They can also be classified according to asset levels based on whether they are debt or equity-based.
Types of Trading Instruments
Broader classification of the trading instruments gives rise to five categories: indices, commodities, equities, bonds and forex which are as discussed below;
- Stock Indices
This type of instrument indicates the performance of the stock market or part of it. The price of select stocks from a variety of companies is weighted and listed, making it easy for traders to compare returns from particular investments. The listed companies are derived from select top shares in a given exchange market. Stock indices are important because they can represent the performance of a country’s economy or the global stock market.
However, stock indices have no essential value but rather they move in points to reflect the changing stock prices of underlying assets. Trading a stock index is possible through the use of a tracking fund or derivatives such as CFDs or Exchange Traded Funds (ETF).
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Like the common definition, commodities refer to a basic good used in business and can be interchanged with other goods of the same type. Examples of commodities are; agricultural products, gold, oil and gas, and silver.
To buy and sell commodities, traders can use futures contracts on exchanges, possible through creating a trading account with reputable registered brokers such as is available on metatrader4 download. On the trading platform, you are likely to find the commodities trading option with gold likely to be one of the metals available.
- Individual Equities
Traders have the option of investing in individual stocks from companies through equities which offer less exposure compared to indices. Through stock trading, the investor can gain ownership of a company based on the number of shares bought. The advantage with stocks is that they offer high liquidity, while the number of trades and unpredictability which change daily allows traders the chance to take advantage of every price movement.
Also referred to as Exchange Traded Funds, bonds help in tracking the performance of a sector’s indices or commodities. Trading in bonds is considered a way to mitigate the different risks associated with unexpected losses or bad choices when picking stocks. ETF’s allow you to invest in a variety of different stocks and shares which helps mitigate any risks because you have a number of investments where if one makes a loss the others will offer some returns.
Another advantage is that ETFs offer traders the chance to invest in multiple companies with very little capital. This is possible because ETFs collect money from different investors and then divide the shares accordingly making it possible to invest in what was impossible as an individual. While the share may look small to an investor, any rise in shares for the company means that your share value increases.
The foreign exchange market is the largest in the world where investors simply trade currencies by simply taking advantage of the currency pair price changes. Currency pairs are derived from the world’s biggest economies making up the most common Forex instrument. Some of the most common instruments are; EUR/USD, GBP/USD, EUR/GBP, USD/JPY, AUD/USD, and EUR/CHF among others. Forex offers stability compared to other instruments in addition to their availability which makes it possible to trade at any time from anywhere. In addition, traders can engage in short term day trading since Forex offers high liquidity.
Which is the Best Trading Instrument?
With all the information above, it might be hard to make a decision even with enough resources which are why you should consider the following factors;
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- Liquidity- consider how easy it is to buy and sell the instrument at any time and pick the one with the highest liquidity.
- Volatility- Financial security tends to rise and fall which affects your profits since you trade on the movements. High volatility yields higher profits.
- The information available – Knowledge, is power. To make profits, you need all the information available, especially on market trends.
Picking the best trading instrument is only possible with enough information which is why a wise trader should consider understanding each and matching it to their investment needs.