REGISTER
PRACTICE TRADING
LOGIN
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]
What are the Most Popular Trading Instruments?
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]
1. CFDs on Stocks
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:
- FTSE 100: This index contains the top 100 largest companies by market capitalisation listed in the LSE (London Stock Exchange).
- Dax 40: This is a blue chip stock market comprising 40 most liquid German companies that trade in the Frankfurt Stock Exchange.
- Hang-Seng: Here you will find 50 constituent companies that are weighted by free-float adjusted market capitalisation index in Hong Kong.
- NASDAQ Composite: This stock market index consists of more than 3,000 stocks of the world’s technology giants listed on the NASDAQ stock exchange.
- S&P 500: S&P 500, also known as the Standard and Poor’s 500, is an index that consists of 500 of the largest stocks trading on the New York Stock Exchange (NYSE).
- Dow and Jones Industrial Average: The Dow and Jones Industrial Average (DJIA) is a price-weighted average of the 30 largest and most influential companies in the US.
Key Considerations
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.
2. CFDs on Futures
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.
Key Considerations
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:
- Capital: Trading futures typically requires less capital compared to stocks trading. However, different markets have different capital requirements and some may demand up to a few thousand dollars.
- Flexibility: Despite offering some flexibility, traders should keep in mind that official futures markets change depending on the contract in question. Therefore, you may need to get out of your positions before your particular contract closes trading.
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.
3. CFDs on Options 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:
- Call: This buy option enables you to buy a particular asset at a specific price.
- Put: This is a sell option that allows you to sell a particular asset at a certain price.
Moreover, there are numerous different global, capital and emerging markets that allow users to trade options. These include:
- Index options
- Options on futures
- Stock options
- Mini Index options
- Mini options
- Crude oil options
- ETF options
- OEX options
- S&P 500 options
- Weekly Spy options
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.
The Bottom-line
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. [2]
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.
References
- “Trading Instruments – Which are the Most Profitable? | tixee.” 7 Jul. 2021, https://tixee.com/most-profitable-trading-instruments/. Accessed 8 Apr. 2022.
- “Top Day Trading Instruments – Investopedia.” https://www.investopedia.com/articles/active-trading/030415/top-day-trading-instruments.asp. Accessed 8 Apr. 2022.
The information has been prepared as of the date published and is subject to change thereafter. The information is provided for educational purposes only and doesn't take into account your personal objectives, financial circumstances, or needs. It does not constitute investment advice. We encourage you to seek independent advice if necessary. The information has not been prepared in accordance with legal requirements designed to promote the independence of investment research. No representation or warranty is given as to the accuracy or completeness of any information contained within. This material may contain historical or past performance figures and should not be relied on. Furthermore estimates, forward-looking statements, and forecasts cannot be guaranteed. The information on this site and the products and services offered are not intended for distribution to any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.
