How to Choose Your Perfect Instrument to Trade

financial instruments

If you have decided to start your career in trading, you might have come across the term trading instruments. They refer to the different types of markets you can trade. Sometimes called securities, they can be anything from currencies and metals to stocks and CFDs, etc.

Every day, a huge number of financial instruments are being traded on the stock market with millions of people worldwide. If you want to be serious about trading and make a profit, you should be very careful about choosing the instrument that would be perfect for you. There are numerous instruments that you can trade to take full advantage of price movements to gain as much profit as possible. However, you have to research thoroughly to find the instrument that would be perfect for you.

Categories of financial instruments

Financial instruments fall into five broad categories: equities, indices, bonds, commodities, and forex. Given the broad variety of financial instruments, there are several considerations that one should weigh before trading any of the above.

Each instrument has its pros and cons, but there are certain things that are in common, such as factors to consider while choosing the instrument that’s right for you.

If you’re looking to get involved in Forex trading, you should consider many important factors, such as finding the right broker, getting information, checking the regulations of your country and the country where your broker is registered. Many people often overlook the last point, as they only look at the reviews of a specific broker and not checking how they’re regulated. It is advisable to find a broker that’s regulated in a country with strong financial systems. The United States, United Kingdom, and Australia fall under that category, but recently another country has emerged as a hub of FX trading. The most reliable South African Forex brokers have chosen SA as a country for their operations because of the uniqueness of the regulations that don’t put strict leverage limits like they do in most of the European countries.

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Important factors to consider

As mentioned, all instruments have their advantages and disadvantages, but when it comes down to making a decision between them, you can look at some of the common factors that you must consider in order to make an informed decision. We’re going to look at liquidity, volatility, and transaction costs to help you choose the perfect instrument.

Liquidity refers to the ability to purchase and sell a financial instrument at any given time. Instruments with high liquidity levels tend to be easily tradable as one can easily enter and exit a position.

Volatility refers to financial security's tendency to rise and fall quickly. It’s a double-edged sword and can go either way for the trader. Even though it may lead to great profits, a slight mistake in periods of high volatility and losses appear to accumulate far faster.

A financial instrument with low transaction costs is ideal because it enables one to achieve maximum returns on any specific trade. Brokers charge varying trading fees for the different financial instruments.

Taking all that into account, you should also look at the resources that you have and the time you’re willing to dedicate to making a career out of trading. For example, starting on the Forex markets would be easier for you, as it doesn’t require large sums of money, and leverage is always on offer, whereas investing in government bonds, will require significantly larger investment on your part.

Over the years, the Forex market has emerged as a go-to way for most people to launch investment careers in the financial markets. With the biggest daily turnover of over 5 trillion, the FX market is the most liquid one so far, making it easy to open and close trades to take full advantage of small price changes.

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Another reason why people flock to the FX market is the low capital requirements. Especially compared to the other securities, you can get a headstart on the Fx market with as little as $100 to $1000.

The financial markets offer a wide range of opportunities to trade different instruments. It is this diversity that makes trading so attractive for most people, but having this many options doesn’t guarantee that each of the instruments would be right for everyone. As mentioned before, the first step into making a decision on the instrument that’s right for you is thoroughly researching them to better understand the factors that are likely to affect the price. Every expert agrees that a key to a successful, profitable investment is getting knowledge and a good understanding of the financial instrument of your choice.

Therefore, to conclude, you should really take enough time to thoroughly research and understand all the different instruments that you can choose from. This will be a first step ensuring that your trading career is a success. You should weigh well all your options before you decide to step into the market. Just because most people are doing something doesn’t necessarily mean it will also be a great fit for you. The best way to create a profitable career is through trial and error until you find what works best for you.

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