
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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