Choosing the Right Financial Instrument to Trade

15 April, 2021

For any trader about to enter the markets, a crucial part of the process is deciding on a suitable financial instrument to trade on. Choosing the right market can help traders significantly increase their trading potential. The financial market is made up of many hundreds of instruments across several asset classes. Each different type offers traders the opportunity to take advantage of price movements and to potentially make a profit on their investment. Before selecting a financial instrument to trade on, there are many factors a trader should consider, including liquidity, volatility, transaction costs, and the information available.

What is a Financial Instrument?

In simple terms, a financial instrument is an asset or capital package that can be traded. It represents monetary contracts between parties, which can be created, traded, modified, and settled. There are two main types of financial instruments: cash instruments and derivative instruments.
Cash Instruments

  • The value of a cash instrument derives directly from and is influenced and determined by the markets
  • Cash instruments can be securities, which can be easily transferable
  • They can also take the form of loans and deposits, in which a lender and a borrower make an agreement on a transfer

Derivative Instruments

  • The value of a derivative instrument is based on the value and characteristics of one or more underlying components, such as an asset, index, or interest rate
  • Most derivatives can be traded over-the-counter, or off-exchange, whereby securities are priced and traded away from formal exchanges
  • There are also exchange traded derivatives, which are standardised financial contracts that are traded on an exchange and are guaranteed

Tips on Selecting a Financial Instrument

When it comes to choosing a financial instrument to trade, there is such a wide choice, meaning it can seem a tricky task, especially when first starting out in the world of trading. However, we have put together a few tips and factors to consider when selecting financial instruments, to help with what is an important decision.
Liquidity

  • Refers to the ease with which an asset can be bought or sold at any given time
  • Highly liquid markets and instruments are usually the easiest to trade as it is possible to enter and exit a position quickly and efficiently

Volatility

  • Refers to the ability of an instrument to sharply fluctuate in value
  • It can be both positive and negative, as high volatility can lead to greater profits, but also quicker and larger losses

Costs

  • It is better to trade instruments with low transaction costs, as it allows for optimum trade returns
  • The amounts charged by brokers on instruments can vary dramatically, so research and compare the specific fees involved

Information

  • The more information the better when it comes to trading a financial instrument
  • News can affect prices, so it is recommended to trade instruments that have a wide range of accessible information about them

Financial Instruments Available with IronFX

IronFX offers traders access to more than 300 tradable instruments across 6 asset classes, including forex, metals, indices, commodities, futures, and shares. It is possible to trade the world’s largest markets with the deepest liquidity pool, along with hundreds of CFD assets. Forex

  • Trade the world’s most popular currency pairs, including EUR/USD, USD/JPY and GBP/USD
  • The foreign exchange market is the largest and most liquid financial market in the world

Metals

  • Trade CFDs on numerous precious metals, including gold and silver
  • Diversify one’s portfolio with a safe haven investment in times of political instability and economic uncertainty

Indices

  • Speculate on price movements in stock indices, such as UK 100, NASDAQ and Germany 30
  • Exposure to the global market and insight on multiple trading opportunities

Commodities

  • Trade CFDs on numerous precious metals, including gold and silver
  • Diversify one’s portfolio with a safe haven investment in times of political instability and economic uncertainty

Futures

  • Speculate on the direction of a commodity’s price movement
  • Popular option among beginner and experienced traders looking for a flexible and diversified portfolio

Shares

  • Invest in stocks of the world’s largest companies, including global brands such as Apple, Google, and Amazon
  • Enjoy the ability to go long or short on positions with fast execution and low spreads
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