Trading instruments are financial assets and contracts that can be traded on the markets. They range from equities and forward contracts to indices, currencies and metals.
Stocks are the most common type of trading instrument. They represent fractional ownership in a company and are usually traded on stock exchanges.
Stocks
Stocks are shares of ownership in a company, and they allow you to become an owner of a piece of the corporation. They come in different types, including common and preferred, which entitle owners to vote at shareholder meetings and receive dividends from the company.
In the long term, stocks typically outperform alternatives like bank certificates of deposit and gold. They also have historically outperformed Treasury bonds.
Traders buy and sell shares of companies to make short-term profits, watching for changes in their prices. They often use stop-loss orders to close out trades when they reach a specific price level.
Some stocks pay dividends to investors, which can be a significant part of overall stock market returns. This is particularly true for growth stocks, which have earnings growing at a faster rate than the market average.
Gold
Gold is a popular metal that can be traded via CFDs, ETFs, futures and options. It is also widely used as a safe-haven asset during periods of economic crisis.
The price of gold is driven by a number of factors including political, economic and social factors. It is also influenced by currency fluctuations.
Trading gold is possible through bullion, CFDs, mining stocks and metal ETFs. However, these instruments come with a high risk of loss as they can be leveraged.
Gold Futures are contracts that enable traders to trade gold at fixed terms, prices and quantities on a specific date in the future. This is called the settlement day. Traders may choose to delay the settlement day in order to speculate before it happens, and only settle their gains or losses once the trade has reached its expiry date.
Currency
The exchange of goods and services is among the most universal activities in human life. To facilitate these transactions, people settle on something that will serve as a medium of exchange–they select something to be money.
Currency, also called foreign exchange, is a standardized system of monetary value that governments print to support their economies and thereby ensure their stability. Examples of these currencies include the United States dollar (USD), the European Union euro (EUR), and the Japanese yen (JPY).
A currency can be traded in two ways: spot or future. Spot deals involve the exchange of one currency for another at a specific time and at a fixed price.
Currencies can be traded in the interbank market, which allows banks and other financial institutions to buy and sell their currencies. Unlike in stock markets, individual retail investors can’t trade currencies on the interbank market.
Commodities
Commodities are trading instruments that allow investors to buy or sell goods such as oil, gold and metals at current and future prices. They are usually traded on exchanges, such as the Chicago Mercantile Exchange (CME) and New York Mercantile Exchange (NYMEX).
When trading commodities, it is important to keep in mind the factors that can impact market prices. For example, weather and geopolitics can be key drivers of prices.
The health of the global economy can also play a role in commodity demand, as it affects supply and demand for many commodities. For instance, during periods of strong economic growth, there is more construction and manufacturing activity in the world and this increases demand for commodities such as crude oil and natural gas.
A good way to trade commodities is by trading futures contracts on a commodities exchange. These contracts specify the terms of delivery for an asset in a specified timeframe. These contracts are used by major industrial consumers such as airline companies and farming cooperatives to hedge against volatility in the market for the goods they consume.