While forex trading is a useful way for rookies to cut their teeth, there are several less popular financial instruments that have been undeservedly overlooked by the bulk of the trading community. The most important challenge for a newcomer is finding the type of trading best suited to their needs and their personality. For many, the answer may lie in one of these lesser-spotted financial instruments.
It is not necessarily surprising that forex markets have become one of the most popular choices, particularly for beginner traders. Forex is a form of trading that people may have had more exposure to, whether through changing currencies before going on holiday or hearing about currency fluctuations on the news. While forex trading has its merits, the wider world of trading is full of eclectic financial instruments worth exploring.
Here is a guide to some of the alternative financial instruments that offer a different kind of challenge but also bring their own rewards, whether in terms of potential monetary gain or strategic stimulation.
Stock market indices
In financial terms, an index is a measure of changing value in a market. Stock market indices therefore display the value of public companies in the form of tradable stocks. The S&P 500 is perhaps the most famous index of the US stock market, featuring stocks from 500 of the world’s biggest businesses, but there are thousands of stock options available in exchanges throughout the world.
This provides a vast range of trading options, so indices traders are able to easily diversify their portfolio and minimise risks to fit with a long-term strategy. Learning how to trade indices also opens up another opportunity to take advantage of important political or economic developments. If you’re already a keen follower of current affairs, then a knowledge of trading indices could help you turn that interest into profit as you respond quickly to changes in stock market sentiment.
Some people find the general concept of stock market indices appealing but intimidating, given the sheer range of options out there. If that is the case, then index funds are the ideal solution. An index fund consists of a selection of stocks that are representative of a market index, giving investors immediate access to a diverse stock portfolio that covers a range of companies.
If a market index generally trends upwards, then the index fund should consequently generate a profit. Index funds remove many of the most important decisions of trading stock indices. A fund manager with intuitive knowledge of the markets will choose the most suitable stocks to form the fund, while committing to an index fund portfolio removes the chance of succumbing to emotion and making rash trading decisions.
ETFs and ETNs
An exchange-traded fund (ETF) is similar to other mutual funds in its mechanism. Like an index fund, it can be a collection of stocks that broadly track the ups and downs of a market. The key difference is that the price of an ETF can rise and fall during the day of trading, unlike most mutual funds that only shift in value at the close of play each day. These fluctuations throughout the day provide trading opportunities for an ETF owner.
An exchange-traded note (ETN) is a rarely used financial instrument, but it comes with a distinctive set of benefits. While assets within an ETF are continually bought and sold, an ETN operates more like a bond and pays out on investments once maturity is reached. An ETN can, therefore, accrue fewer expenses, while any profits from the note will be liable to a lower tax rate than an ETF.
Vanilla options could be ideally suited to a trader who trusts their capacity to forecast long-term market movements. The owner of a vanilla option has the ability to buy or sell an asset at a prearranged strike price. Buying an underlying asset at the strike price is known as a call, while selling at the strike price is known as a put.
There is no requirement to either buy or sell a vanilla option, although there will be a fixed time period in which to make this decision. Why use vanilla options? A trader anticipating a rise in the market could buy a call option, locking in an asset price that could end up being a bargain after an upswing in value. Conversely, put options may be attractive to someone predicting tough times for a market.
If you know that you prefer a hands-on trading approach that rewards accurate analysis of short- and medium-term trends, then stock market indices and vanilla options could be the perfect fit. Those seeking longer-term investment options that are less susceptible to volatility and less reliant on regular input could be more suited to index funds or ETNs. While these financial instruments may have been largely overlooked by the investing community, they have lots to offer traders.
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