Trading is often thought of as a single monolithic topic by those with only a passing familiarity with it, but in reality, this one term encompasses many distinct financial instruments. Each type of trade comes with its own set of specific benefits and drawbacks, meaning that the correct approach to committing funds to an asset can vary between people and organizations with specific priorities, requirements and means.
Suffice to say, the first step on the path to identifying the correct one for you is to get a clear overview of the options among which you may select. In light of this, here we’re going to take a rundown of some of the common but oft-misunderstood forms of finance trading instruments you’re likely to encounter when starting out.
Contract for Difference (CFDs)
CFD is short for ‘Contract for Difference’ and refers to the act of opening a speculative position on a stock or commodity without actually trading the asset itself. Instead, you’re making an informed prediction about whether the asset in question will increase or decrease in price over a given time window.
As a result of this, CFD trading with Equiti and other reputable platforms offers a unique means of engaging with global markets. Unlike conventional trades, this means you only need to deposit a fractional percentage of the total trade value to open a position on it. This can potentially result in larger profits. CFDs also eschew the need for stamp duty – this is unlike regular trades, as you do not personally own the asset you’re trading on.
Forex Trading
With this one, the key is in the name – Forex is a contraction of ‘Foreign Exchange,’ and it deals with the trade of fiat currencies around the world. At present, it is the largest market in the world, with some $5 trillion traded every day.
Forex traders look at fluctuations in a currency’s exchange rate and buy or sell in line with their predictions as to whether the price or ‘strength’ of a currency will continue to increase or decrease. This price can fluctuate due to many factors, from changes in local government fiscal policy to economic shocks and technological innovation. Thus, it rewards traders with a good understanding of geopolitics.
Forex trading is typically done in pairs, meaning the trade is conducted on whether the strength of one currency, such as the US dollar, will become stronger or weaker when compared with another, such as the Euro.
Stocks
This is the classic trading product most people are familiar with. Often also referred to as shares, in stock trading, the object is to buy and sell shares – literally a portion of the overall value of a company – in line with expectations as to how that company and its products will perform in the global marketplace.
Holding shares in companies considered to be at the forefront of a growing industry is typically considered a safe choice, though speculative bubbles – when the predicted value of a company or industry exceeds its real-world growth – must be factored in.
Likewise, buying shares in a company that may represent a disruptive element in the marketplace is typically considered a high-risk option but one that may yield greater returns if your assumptions prove correct.
Commodities
Simply put, commodities refer to the raw materials upon which much of the global economy is based. From oil and gold to foodstuffs such as wheat, commodities trading relies on making informed estimations as to the way demand for these products fluctuates over time.
Getting in on the ground of a newly relevant commodity can occasionally prove highly lucrative. For example, the precious minerals utilized in batteries have enjoyed sustained growth for a number of years as nations and companies around the world prioritize electrification.
