19.01.2021

Trading instruments

Trading instruments

Before openiny any business account, the first step to succeed in trading is to get to know basic terms. In the very beginning, we will explain and divide professional trading instruments such as stocks, commodities, indices and currency pairs. One should get to know these terms regardless of their interest, be it securities trading or contracts for difference (CFDs). This article will reveal more information on each instruments as well as its advantages. 

 

Stocks  

The most commonly known stocks are large company stocks such as car manufacturer Tesla, Alphabet - the parent company of Google, a streaming service provider Netflix or e-commerce platform Alibaba. Stock value progress is largely affected not only by economic results of each company and market segment development in which each company trades, but also political situation and global economy progress can play a key role. In a situation when the above mentioned factors develop positively, the company's shares grow. In case of a negative development, shares might temporarily drop. 

 

Physical shares

Securities represent a part of the share capital of the company having issued them. By buying stocks, you become a shareholder and you can participate in dividing the company's profit into dividents. By buying stocks, you receive voting rights, whose impact depends of the amount of shares you own. When the stock value grows, you profit. On the other hand, once the stock value drops, you begin to lose. In case the company went bankrupt, you could be entitled to liquidation balance. 

 

CFD stares

CFDs enable trading with company's stocks without owning the underlying assets. CFDs offer stock, commodities, indices and forex trading. You don’t need to buy  underlying assets, yet you are entitled to speculate on buying and selling price. The CFD stocks owner has no rights similar to a shareholder, a holder of physical shares. The stock owner can speculate either on growth or drop of the given asset. Moreover, you can use financial leverage enabling trading with larger volumes. 

 

 

Forex

 

The term forex stands for foreign exchange market, where currency pairs are traded. There are two currencies in currency pairs and they are marked as base currency and quote currency. Forex is market with the greatest liquidity (asset property, which allows assets to be bought and sold at stable, transparent prices) globally. The most commonly traded currency pairs in the world are, for example,  EUR/USD, GBP/ USD, USD/JPY, USD/CAD, USD/CHF or AUD/USD. These currency pairs are referred to as majors. Forex is open 24 hours a day, 5 days a week. The market is decentralized, what means that trades take place online. 

 

Indices

When investing into indices, you invest into the value of companies located in the given index. By investing into CFD indices, investors and traders diversify their portfolios. We can distinguish so called sample indices representing stock samples traded on a specific market or summary indices, including all stocks traded on a specific market. Indices serve to measure performance, it’s so called benchmark index. As such, they illustrate growth of large number of shares in one stock value.

Apart from that, there are other indices:

Price-weighted indices

The overall index value develops based on shares involved in the index. The higher the company’s stock price is, the more it affects the overall value of the specific index. Volume of the traded stocks is not taken into account. Dow Jones Industrial Average and Nikkei 225 can serve as such examples. 

Indices based on market capitalization

Unlike the above mentioned option, the value of the given index is affected also by number of all outstanding stocks. In reality, this means that company shares traded in large volumes have much higher impact of price of the specific index than less traded companies. DAX, S & P 500 and NASDAQ Composite represent such indices. 

 

Commodities

 

A commodity market is a rather smaller market, yet in general is considered to be a safe harbour in periods of economic fluctuations. Investors often lean towards commodities when price of other financial instuments on capital markets drop. In general, apart from energy commodities and precious metals (which are lowering in amount due to constant mining), commodities represent an interesting possibility of diversifying trading portfolio with the potential for more significant value growth.

 

In general, we can divide commodities into:

 

- precious metals such as gold, silver, palladium, etc. 

- basic metals such as lead, copper, aluminum, etc.

- energy commodities such as oil and natural gass, etc.

- cereals such as corn, wheat, barley, etc.

- others such as cocoa, sugar, etc. 

The content of this material constitutes marketing communication and should not be considered as any type of investment advice and/or investment research and/or a solicitation for any transactions. This material was prepared for informational/educational purposes only and does not imply an obligation to perform investment transactions nor does it guarantee or predict future performance. BCM Begin Capital Markets Cy Ltd and its relevant persons including affiliates, agents, directors, or employees do not guarantee the accuracy, validity, timeliness, or completeness of any information/data provided by third parties and assume no liability for any loss arising from any investment made based on the said information/data. Past performance is no guarantee of future results.