Different Trading Instruments in Forex and CFDs
Trading instruments are the various kinds of financial contracts and assets that can be traded in the financial markets. Trading instruments can be classified into different categories, with some more popular than the others. They range from stock and bond contracts to fixed indices, commodities, and many more. The different trading instruments depend on the underlying investment and the future date.
Among the most popular trading instruments in the stock exchange are forward and option contracts. These are futures contracts which allow sellers to buy a quantity of goods at a given date for a certain price. The contract will expire when the buyer pays the seller. However, they are not restricted to specific dates and can even be held for months. Some contracts, such as put and call options, are traded only during specific hours.
Speculative trading is also one of the trading instruments performed on the stock exchange. Speculation refers to buying or selling of a commodity in anticipation of its appreciation in the future market price. Futures trading instruments, such as forward contracts, are traded in anticipation of future prices in commodities. Similarly, options trading instruments are traded to provide the owner with the right to buy or sell a specified asset at a specified date in the future.
Other trading instruments in the stock market include forward and option contracts, swap agreements, foreign exchange-traded commodities, equity indexation, credit default swaps, interest rate swaptions, mortgage indexed instruments, money market instruments, treasury bills, credit default swaps, and commodity futures. The contracts are traded in the stock exchange by companies, funds and individuals. In the Forex market, the principal commodities traded are the U.S. Dollar index, the Eurodollar index, the Japanese Yen index, the Swiss Franc and the British Pound. The futures contracts are traded under the futures exchange agreement, the spot contract, the foreign exchange forward contract, the equity contract, the commodity future trading agreement, and the equity swap agreement.
Commodities trading instruments are generally categorized into two categories namely; primary commodities and secondary commodities. A commodity futures trading instrument is an agreement that buys and sells a quantity of a particular commodity at a particular rate at a particular date within the definite term. Most of the trading instruments use the four main commodities namely; agricultural produce, basic material like iron ore, coal, wheat and timber, metal ores and fuel. The trading of primary commodities is done through delivery, collection, storage and transportation of such commodities. This is done on behalf of the seller, and buyers pay for the commodity upon delivery.
On the other hand, the second type of trading instruments is currency trading. This involves trading of the currencies of various countries. Some of the major countries of the world are the United States of America, Japan, Europe, China, Russia, India, Brazil, South Africa, Netherlands and Switzerland. There are also a variety of options for this type of trading. One can trade stocks, option contracts, futures, forex and CFDs.
Forex and CFDs are financial instruments that are traded over the counter. This means that there are two parties to the transaction, and both of them have the power to decide the selling and buying prices. Financial instruments like these are leveraged and bear no relationship to the real market prices. The most well-known examples of such financial instruments as trading on margin and forex trading are the Commodity Futures Trading Commission (CFTC) and the Futures Trading Commission (FTC).
CFDs and CFD trading instruments refer to derivatives. Derivatives are contracts that allow one party to gain benefits by allowing another party to make a certain contract with them in the form of payment. These trading instruments are mainly traded in the stock markets. It can either be traded over the counter or directly through the banks. The CFD trading is different because it uses the derivative market as a place to secure margin deposits. Both CFDs and CFD trading are leveraged and the risks in them are higher than the stocks and options traded in the traditional markets.