Trading instruments are the different ways you can trade financial markets. A trading instrument can be a share, currency pair, or commodity. The number of trading instruments in different financial markets varies depending on what is being traded.
1. Foreign exchange (FX)
The foreign exchange market is the largest financial market in the world, with an average daily trading volume of $US$ trillion. It’s open 24 hours a day, five days a week, and it has no central location; instead, trading occurs electronically across major financial centers around the globe.
As a result, traders can be found on their laptops or smartphones from anywhere – at home or holidaying abroad. The forex market trades currency pairs through banks and brokers using Electronic Communications Networks (ECNs). The Contracts For Difference (CFDs) offered by brokers are a popular way to trade the FX market. They allow traders to take advantage of price movements without owning the underlying currency pair.
2. Commodities
Commodity markets trade energy, precious metals, and agricultural products such as corn, wheat, soybeans, and cattle. For thousands of years, they have been around exchanges that traded gold coins in the Middle East date back to 600BC, while rice futures were being traded on the Dojima Rice Exchange in Japan as early as 1750. Today’s commodity markets are regulated by governments and can be accessed through several platforms, including online brokers.
The price you pay for commodities depends on many factors: supply and demand; seasonal variations; shipping costs; weather conditions affecting crops or livestock (e.g., drought); political factors (e.g., war); and more recently, speculation from speculators who don’t intend use the commodity want to make a profit from its price movements.
3. Equities (stocks)
Equity, or stock, is a security that represents an ownership interest in a corporation. When you buy stocks, you become a part-owner of the company and are entitled to dividends (a portion of the company’s profits paid out to shareholders) and voting rights. You can trade stocks through online brokers or your bank.
The price of stocks depends on several factors, including the company’s financial performance; how much profit it has made (or lost); the amount of debt it owes; its industry sector, global economic conditions, and more recently, speculation from investors.
4. Currencies
The foreign exchange market, or forex market, trades currencies. A currency pair consists of two currencies and is traded through banks and brokers using Electronic Communications Networks (ECNs). The most popular currency pairs are called the “majors” and include the US dollar, euro, British pound, Japanese yen, Swiss franc, Canadian dollar, and Australian dollar.
The price of a currency pair depends on several factors, including interest rates in each country; economic conditions in both countries; political stability (or instability); and global events that may impact one or both economies.
5. Stock indices
A stock index, sometimes known as a market index or share index, is a weighted average of the prices of selected stocks that represent a particular segment of the overall financial market (e.g., companies in a specific industry sector). The most well-known stock indices are great to consider.
You can trade stock indices through online brokers. However, it is important to note that you cannot buy or sell shares in an exchange-traded fund; instead, you purchase contracts for the difference which track the value of an underlying asset.
6. Bonds
A bond is a debt security that pays periodic interest payments (coupons) to the holder until it matures (i.e., the principal is repaid). Bonds are issued by governments and corporations and can be traded through banks or brokers.
The bond’s price depends on several factors, including the issuer’s credit rating, how much money it owes, the term or maturity of the bond, prevailing interest rates, and demand from investors.
7. Derivatives
Derivatives are financial contracts that derive value from an underlying asset (e.g., a stock, currency, or commodity). There are many types of derivatives, including futures and options. Futures give the buyer the right to purchase something at a specified price on a predetermined date in the future. In contrast, options give the holder either the right to buy (call option) or sell (put option) an asset at a pre-agreed price within a specific period.
You can trade derivatives through banks, brokers, or exchanges such as CME Group and Chicago Board Options Exchange. The derivative market is also traded over the counter, which means buyers and sellers transact privately via telephone calls rather than through centralized exchange trading floors.
8. Real estate
Real estate is property, including land and buildings. It can be traded through investment trusts, real estate investment funds (REITs), or purchased directly from owners.
Conclusion
The financial markets are a complex web of securities, derivatives, and contracts that beginners can find overwhelming. However, with a little bit of research and understanding, you will be able to navigate these markets and make informed investment decisions confidently.