Millions of people around the world are brought together by financial instrument trading. There are different types of instruments and securities you can trade to take advantage of price movements and make a substantial profit. Financial instruments are classified into indices, commodities, equities, forex, and bonds. Given the wide variety of these instruments, there are factors you should consider before trading any of these instruments.
Factors to consider when choosing financial instruments
Choosing the right financial instrument to trade will help you take advantage of income-generating opportunities presented by financial markets. Below are factors to consider before selecting an instrument to trade:
- Liquidity. Liquidity represents the ease of selling and buying a financial instrument at any period. High liquidity instruments are easy to trade as it is easy to enter and exit a position.
- Volatility. This is the ability of the financial instrument to gain and drop sharply. Volatility is a double-edged sword that could be good and bad. High volatility suits seasoned traders and helps them generate profit. However, during high volatility, a small mistake can lead to great losses.
- Low costs of transactions. A financial security with low costs of transactions is ideal. It aids in the generation of optimum returns in any trade. Different financial instruments have varying trading fees charged by brokers.
- Accessibility of information. For one to have a successful trading career, there should be readily available information on the chosen financial security. Prices are affected by news and you should only trade instruments whose information and news is easy to access.
Top four financial instruments to trade
Foreign exchange (Forex)
The foreign exchange market is the largest financial market in the world and has a variety of financial instruments to trade daily. This market has a daily average volume of $5 trillion. The best time to trade forex is when the volatility is high. Forex involves trading currencies by taking advantage of changes in the prices of currency pairs. Known as majors, the most traded currency pairs are the USD/JPY, GBP/USD, USD/CHF, and EUR/USD among others. These are the currencies of some of the world’s biggest economies.
Because they are relatively stable, forex instruments are among the best instruments to trade. They are available throughout the day, making it easy to trade them regardless of your location. Forex instruments are suitable for short-term day trading because they offer high liquidity.
Stock indices provide insight into the performance of the wide stock market. These indices list company stocks depending on their market cap and industry. The select stock prices are weighed to make it easy for investors to compare returns from certain investments.
Stock indices could depict the performance of a country’s economy or that of the global stock market. One of the best stock indices is the S&P 500. Stocks of some of the biggest companies in the U.S. are listed on this index. Being a diverse instrument, the S&P 500 lists stocks of 500 companies. The performance of this index is an indicator of movements in the U.S. market.
Instead of getting exposure via indices, you can choose to trade individual equities of companies. With stock trading, you get to enjoy owning a part of the company. This depends on the number of shares you buy. Stocks are popular instruments because they have high liquidity. Their volatility and trading volumes vary daily allowing traders to take advantage of the smallest price movements.
Taking note of factors that determine stock prices is important when trading stocks. Quarterly earnings are top of the list. These affect stock prices as they are indicators of a company’s financial health and its prospects.
Liquid commodities like gold, silver, and crude oil allow people to trade for a profit. These commodities are a good way to diversify your investments, away from stock indices and equities. You can buy and sell different commodities using futures contracts. These instruments are classified as livestock and meat commodities, agricultural commodities, precious metals, industrial metals, and energy.
Supply and demand forces drive prices in the commodities market. Low supply leads to higher prices due to high demand. The most traded commodity is gold because traders consider it a dependable way of transferring value. To protect against currency devaluation and high inflation, seasoned traders invest in precious metals.