Trading is becoming very popular. There are young investors, who even create a decent source of income by using high-frequency trading styles. By opening and closing positions within a single market day – like day traders do – they manage to benefit from the smallest fluctuations. There are various possible investments for traders on the exchange market, and prospective traders should be aware of their differences in order to pick the investment(s) that suit(s) them best.
In general, the exchange market is subdivided into assets and derivatives. Both categories can be subdivided into even more groups and have their specific advantages as well as disadvantages. In order to make a decision on how to invest your funds, you should know the following things about derivatives and assets.
What are derivatives?
Derivative is one of those financial designations that most of us have heard of, but that only a small percentage of people can define. For prospective traders it’s essential to know what derivatives are, how they can be subdivided and what pros or cons they have in store for investors. This is the most basic knowledge about derivatives:
A derivative is a contract between at least two parties. The value of the financial instrument is based on an underlying asset. Derivatives can be further subdivided into futures, forwards, swaps and options. When investing in a derivative, the trader doesn´t own an asset, but merely places a bet on one.
For traders, options are possibly the most common types of derivatives to invest in. Active traders with a strong appetite for risk and lucrativeness often prefer binary options. These are easy to process as they are based on a simple yes-or-no question. To be on the safe side, you should only trade them on a regulated market and with a regulated online broker for binary options. According to the Binaryoptions.com Review, Pocket Option is such a regulated and well-known binary options trader.
When investing in an option, the trader usually makes a prediction on a certain exchange market value of the underlying asset. If it comes true within a set time frame, the trader is entitled to buy or sell the option in accordance with the options contract. Binary options are also called all-or-nothing options. The name derives from the fact that the trader doesn´t need to predict a certain value – all traders have to do is state whether of not the underlying asset will be above or below a stated price on the time of the option´s expiration. Was the trader right, he can celebrate a high profit. Was he wrong, the option goes valueless.
What are assets?
Assets are resources with economic value. Traders, traditional investors, governments or companies hold them in expectation of a future benefit. Assets can be stocks, cryptocurrencies, foreign currencies on the forex market or commodities. Traders, who purchase assets, become the legit owner of their market shares. That fact entitles them to hold the asset or to sell it at some point – be it in the near future or many years after the purchase.
What is the difference between assets and derivatives?
Investors, who buy assets, own stocks, commodities, cryptocurrencies, precious metal or foreign currencies, and benefit from them if their value goes up. If they sell them, they can book a profit, which is based on the difference between the purchase price and the selling price. Investors, who work with derivatives, never actually own an asset, but can still benefit from its price development.
Are derivatives or assets the better investment?
Derivatives can be leveraged. That means that investors can multiply they deposit by paying a margin. Thanks to the leverage effect, the earnings can be multiplied as well – and so can the losses be. A leverage makes it easier to benefit well from small fluctuations, but poses a higher risk. The decision should always be made individually. There are many different assets and financial instruments on the UK market to pick from.
The above information does not constitute any form of advice or recommendation by London Loves Business and is not intended to be relied upon by users in making (or refraining from making) any investment decisions. Appropriate independent advice should be obtained before making any such decision.