Trading in the financial market is typically carried out using different types of contracts and assets, commonly known as financial instruments. Some trading instruments are more popular among traders than others. It is important to understand the different types of financial instruments available in order to make informed trading decisions and speculations.
Choosing the right trading instrument out of the multitude of options available is a fundamental strategy to start trading. Moreover, devoting ample time to gain sufficient knowledge about financial instruments and the financial market makes it possible for traders to place bids and make the most of market opportunities.[1]
There are a wide variety of financial instruments ranging from forward contracts and equities, to currencies, indices, and more. Trading instruments with the highest daily trading volume are generally more popular among traders.
Before you invest your time, energy and resources in the financial markets, you need to decide which financial instrument is best for you. Fortunately, the tremendous advancements in technology in recent years have yielded a wide range of financial instruments now being readily available to just about anyone.
This article breaks down the most popular forex alternatives, including CFDs on stocks, futures, indexes, options, and more. It will also explore their pros and cons in order to give you all the necessary information to make an informed decision on which instrument may suit your needs and preferences as well as lifestyle constraints.[1]
The stock market is a very popular online market for day traders, due to the plethora of companies to choose from and the ease of accessing the market. In simple terms, it entails the buying and selling shares of a company. The appeal of trading stocks is clear, with a variety of trading instruments available and the chance to trade world-famous companies, from BP and Shell to Google and Amazon.
Moreover, as an extension of CFDs on stocks, traders can also trade popular CFDs on indices, such as:
Major stock markets offer numerous trading opportunities, due to the wide variety of stocks available to choose from. However, trading major stock markets may not be an ideal option for beginners, especially with limited capital as a single share of a stock can be expensive. For example, a share of Chipotle costs upwards of USD$1,500.
To trade with a small starting capital, traders can consider tapping on tools such as Contracts for Differences (CFDs) that allow you to trade with leverage.
Futures markets have become a very popular alternative for online trading. Futures contracts are agreements between buyers and sellers to conduct particular trades at specified prices and dates in the future.
Traders look to create trading opportunities from fluctuations in price between when the buy or sell contracts are made, to when the positions are closed. Most future contracts revolve around commodities such as oils, precious metals, and food.
Future contracts are mainly used as a tool for mitigating risk and unpredictability. For instance, if you know you’ll produce 10,000 liters of milk in the next six months, you could opt to sell it all at the then prevailing market price. On the other hand, prices may fall as a result of a surge in the popularity of dairy-free milk. Therefore, the solution is to sell the milk now at a preset price so you can be assured of a potential return margin.
Financial futures markets operate in the same way. Traders bet a specific index will hit a certain level at a particular point in future.
Before venturing into the futures market, it is important to take some factors into consideration in order to decide whether it is actually for you. These factors include:
Futures may be ideal for anyone who wants to start trading CFDs on commodities, oil, and energy. However, capital requirements may force you to narrow your focus to just a few future contracts.
Technological advancement has led to the development of new financial markets, including the cryptocurrency market which has gained tremendous popularity especially in the last decade.
Cryptocurrencies are digital currencies that come with high volatility levels, making them particularly popular among day traders. When Bitcoin was initially introduced in the market, it was trading for mere pennies of the United States dollar. However, its value has risen to upwards of USD$30,000 per Bitcoin, even hitting USD$60,000 at one stage.[2]
Other digital currencies, also known as altcoins, that you can trade in include:
Most people ask why they should start trading in cryptocurrencies when there are other well established financial markets, such as forex and stocks. Here are some factors you should consider:
Other factors you should take into consideration include exchange risk, accessibility, and regulation of emerging markets.
An option is a financial derivative that gives traders the right to buy and sell assets within a predetermined period. Sellers are legally obligated to meet the terms of their transactions. This is usually to buy or sell if the buyer exercises the option before the expiration date. There are two main types of options:
Moreover, there are numerous different global, capital and emerging markets that allow users to trade options. These include:
It is important to understand what the options you want to trade entail, the risks involved, and whether or not they are ideal for day trading.
This breakdown of the most popular forex alternatives will help you choose a market that suits your specific needs and preferences. Therefore, before you dive into trading, it is essential to consider your market knowledge, risk tolerance, financial circumstances, and how much time you have for trading. [3]
These factors will help you decide which financial market you are best suited for. You should also utilise the wide variety of market resources such as trading guides and websites available.
Access markets including forex, commodities, indices, shares/stocks and more, at low cost.
Start trading by opening a live account here, or practice trading with virtual currency with a demo account.
You can also sign up for our free, weekly webinars that will break down the current markets as well as discuss potential trade set ups for the week.
References
Disclaimer
Vantage does not represent or warrant that the material provided here is accurate, current, or complete, and therefore should not be relied upon as such. The information provided here, whether from a third party or not, is not to be considered as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any financial instruments; or to participate in any specific trading strategy. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. We advise any readers of this content to seek their own advice. Past performance is not an indication of future results whereas reference to examples and/or charts is solely made for illustration and/or educational purposes. Without the approval of Vantage, reproduction or redistribution of this information is not permitted.
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