The financial market gives you access to multiple different instruments, including currency, bonds and stocks. When you open a position, you are placing your capital in the market and, in turn, investing in assets that could provide you with a return.
The market value of a primary financial instrument can fluctuate significantly because the market is inherently volatile. As a trader, your aim is to manipulate this volatility in an attempt to profit from price swings.
You can diversify your portfolio and open a position in the financial market through contracts for difference (CFD), and by using a CFD trading platform like Skilling to trade online and speculate on some of the most actively traded primary financial instruments, without owning the underlying asset.
However, it’s important that you have an in-depth understanding of the factors that can affect the value of a financial instrument before you invest, to avoid making losses on your investment.
To help you to decide where to invest your capital, here’s a guide to some of the most popular primary financial instruments.
Stocks
Stocks are equities, and this means that when you invest in a stock, you are purchasing a share of a company. For example, if you decided to buy Amazon (AMZN) stock, you would own a minute segment of the eCommerce giant.
Stock can be divided into two sections — public and private shares. Public stocks are readily available for any investor to purchase, whereas private stock can only be bought by large equity firms and corporations. Amazon is a public stock, for example and Elon Musk’s company SpaceX is an example of a private stock.
When you trade in stocks, you will aim to profit through capital gains. This process involves selling your shares for more than you paid for them, profiting on their increased value over time.
Additionally, depending on the company that you invest in, you may be able to capitalise on their dividends. This is a portion of the company’s earnings that they may choose to release to their shareholders. Dividends tend to be part of a trader’s long-term investment strategy, since they can provide you with a healthy return over time.
Bonds
Bonds tend to be a popular choice as part of a long-term investment strategy. This is because they usually provide traders with small, but consistent profits. Of course, your capital is at risk no matter which financial market you invest in, since prices can fluctuate and losses can be accumulated.
Government bonds present you with a lower-risk investment than some other instruments however, because the market proves to be less volatile than the likes of the stock market, for example.
When investing in bonds, you’ll need to set up an account with a leveraged provider and could open a CFD trade online. This will enable you to deposit some of your capital and invest in the value of the contract that you establish with a broker, rather than the underlying asset itself.
Currencies
The foreign exchange market (forex) is one of the most actively traded markets in the world and oversees almost $6.6 billion worth of transactions each day. In the forex market, the world’s currencies are exchanged and are traded in pairs. By grouping currencies into pairs, they can be directly compared against one another to determine their individual value.
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In a currency pair there is a base currency and a quote currency. Take the US dollar against the euro (USD/EUR), for example, the US dollar is the base currency and the euro is the quote currency. This means that the value of the dollar is based upon how many euros would be needed to purchase one dollar.
Forex trading takes place over-the-counter (OTC) on electronic trading platforms, and unlike other financial instruments it doesn’t have a physical exchange or central market place. This means that you’ll be able to monitor the market from an online trading site and react quickly to short-term price movements, in an attempt to make gains on your position.
You could achieve your financial goals more effectively when you make your capital work harder for you, investing in primary financial instruments. By carefully studying the market, applying fundamental and technical analysis, and using tools like an economic calendar, you can make informed, calculated decisions in the financial market, putting yourself in a prime position to make potential profits.
