Financial Trading 101: The Basics of Market Investment
So, you've decided to take the plunge into the complex and diverse world of financial market trading. While this is a potentially lucrative decision that could help you to accumulate considerable wealth in the future, however, it's important that you're able to develop a core foundation of knowledge before tackling the markets.
From the volatile foreign exchange (where in excess of $5 trillion is traded every single day) to global equities and commodities, there is now an ever-increasing range of markets for you to invest in. This provides a considerable challenge for new traders, as you must strive to comprehend the mechanics of each marketplace while building a diverse and ultimately profitable portfolio.
In this post, we'll provide a brief insight into the primary markets and asset classes available in the modern age, as you look to determine which ones are right for you.
We start with one of the more secure investment vehicles, which is known commonly as bonds. These are essentially fixed income investments in which an investor loans money to an entity, which is usually either corporate or governmental in its nature. The money is borrowed for a defined period of time and at a fixed or variable interest rate, with the hope being that the underlying asset rise in value over the course of the investment.
Governmental treasury bonds are thought to be among one of the most secure asset classes in this category, while this vehicle is used by companies, sovereign governments and individuals as they look to build a reliable foundation for their portfolio.
Next we come to one of the most popular and balanced investment options, which is company stocks and shares. This is a type of security that has a direct affiliation with private sector corporations, while it also requires investors to assume ownership of the underlying asset class (meaning that performance is dictated by the health of the business in question).
This offers both advantages and disadvantages, as while it may be considered as a secure source of wealth in times of austerity it is also relatively rigid and does not allow investors to profit in a depreciating market.
Preferred stock is the most common type of asset in this space, and while this does not allow voting rights it does provide a higher claim on earnings and more lucrative dividends.
Next we come to commodities, which bear fundamental similarities to stocks as they are physical securities that typically require investors to assume ownership of an underlying financial instrument. There are different vehicles that you can utilise when trading this asset class, however, depending on your outlook and core objectives as an investor.
Let's say that you're a commodities speculator, for example, who wants to profit from volatile price shifts and never seeks to take ownership or delivery of the product in question. In this instance, you can leverage ETFs (electronically-traded funds) to access the market, as this enables you to purchase on margin, sell short and profit from daily price movements.
This flexible vehicle works by tracking the performance of an underlying commodity index, including total return indices based on a single commodity. As a result, you can minimise risk as a trader while also benefiting from margin-based returns.
We close with forex, which is the single most popular, lucrative and volatile market in the world. Investors buy and sell currency through this marketplace, trading pairings as derivatives through which they never take ownership of the underlying asset.
Instead, they speculate on the performance of specific pairing, which in turn enables traders to profit even in a depreciating climate.
While spread betting can be used to profit in this market, CFD trading can also offer excellent returns. If you're asking “what is CDF trading?”, this stands for contracts for difference, and essentially serve as agreements between investors and a financial institution.
This is a popular trading vehicle, not least because it provides far higher leverage than traditional options and helps investors to capitalise on agile and volatile markets such as the foreign exchange. Margin requirements also begin as low as 2% with CFDs, which means minimal capital outlay and the potential for far higher returns over time.