Financial Instruments II

Financial Instruments II

Introduction



From the first part of this post, if you have concluded that financial instruments are of many types, you would be right. Having discussed Forex, stocks, cryptocurrencies, options and CFDs, here, we would be continuing with our discussion with commodities, bonds, and alternative vehicles of stock investing (mutual funds and ETFs).

Financial Instruments. 


By the time you are done, you should be able to make the right choice for yourself among the available financial instruments. So, read on.

Commodities

You already know about commodities. Everyone does. And that is because they are such an important part of our lives. Commodities are those raw materials used for the manufacturing of almost all the finished products we see around us. Typically, there are three categories of them, and they are:

·     Energy: Examples of energy commodities include natural gas, crude oil, and gasoline.
·     Metals: The most popular metallic commodities are gold, platinum, copper, and silver.

·   Agriculture: Agricultural commodities can be either of plant or animal origins. They include soybeans, cocoa, cotton, coffee, sugar, pork bellies, and feeder cattle.


Beyond the traditional investment vehicles, you can use commodities to diversify your portfolio. Assets such as gold and silver have always been regarded as safe-haven assets especially when almost every other financial market is crashing. Nevertheless, they are still so flexible that they can be invested in using other assets such as futures stocks, and ETFs.

Hence, as an investor, you can start benefitting from the use of commodities as An effective and flexible financial instrument to diversify your assets.

Bonds

A bond is a debt instrument the issuer of which owes its holder a debt which he is obliged to pay back at interest at a specified later time known as the maturity date. Thus, a bond is a form of a loan: the issuer is the debtor while the holder is the creditor. The interest payments on bonds, also known as coupons, occur at fixed intervals such as yearly, semiannually, quarterly, and unusual, quarterly.

Bonds are negotiable. That is, their ownership can be transferred to the secondary market after their primary sales by transfer agents at banks. The issuers of bonds use their proceeds to fund either long-term capital investments or recurrent expenditure. Usually, bonds are issued by federal and state governments and corporations, giving rise to their three popular types: treasury, municipal, and corporate bonds.

Alternative Stock Market Investment Instruments

In the first installment of this post, we talked about stocks, also known as equities, and what investing in them actually entails. However, if you are overwhelmed by how much information and analyses you have to take in before you can pick stocks yourself, then you should be happy because there are alternatives for you. They are mutual funds and ETFs.


Mutual funds are as their title suggests: they are made up of funds pooled from many investors which are then professionally managed on their behalf. Exchange-traded funds are similar, but they largely monitor stock market indexes instead. Also, while mutual funds are actively managed, ETFs, on the other hand, are passively managed.

Most importantly, mutual funds and ETFs can easily give you a diversification advantage. After all, they can have as many as 3,000 securities as their component stocks. Also, since, with them, you would not have to analyze anything before you get to make your investment decisions, they will help to make all the hard work off your neck.

Factors to Consider Before Choosing a Financial Instrument to Trade

There are many financial instruments because of the different tastes and preferences that investors have. For example, some investors might prefer to put their money only in safe-haven assets such as gold and silver. Investors with intermediate-risk appetite might want to do stocks or any of its alternatives.

Similarly, others could prefer highly-volatile ones like cryptocurrencies. In the end, the wide range of financial instruments available helps to ensure that no matter your preferences, available capital, access and risk appetite, you will always get a fit. Consequently, you have to take the time and patience to choose the instrument that will be right for you.

In doing so, you might want to consider the following factors:

Liquidity

It should not be of any surprise that the first question you should ask before you choose a financial instrument to trade is its level of liquidity. Liquidity is the ease by which an asset can be bought and sold. Highly-liquid instruments are easy to trade and so are generally preferred.

Volatility

Volatility is the ability of a particular financial instrument to undergo substantial rises and drops in price over a short time. Hence, the price of a highly-volatile financial instrument changes rapidly, rises and falls significantly, within a short amount of time.
Therefore, generally, during periods of high market volatility, trading risks are high and small mistakes can be of disastrous results.

Ease of Access

Before you trade any financial instrument, you should first confirm if it is easily accessible. This easy access is in two forms: first, can it be easily traded? Is the required trading process simple or complex in such a way that it makes it convenient to do? Next, is information readily available on it?
Any financial instrument that does not have readily-available information should not be traded.

Costs of Transaction

No matter the instrument, the cost of transactions is a factor that can quickly become a huge burden for traders. A financial instrument that attracts unreasonable high costs might not make any economic sense to trade. Hence, such instruments are better avoided.

When you consider those factors, you would realize that any of Foreign exchange (Forex), stocks, indices, and commodities will be your best bet. Forex has considerably low entry barriers and transaction costs, high liquidity, and ready availability of information. So, in order to benefit from these advantages and more, you should start trading it now.

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