Trading in stocks and shares has been a traditional way of earning over your investment. Stocks or shares are known as a trading instrument or in simple language as trading product. It is an endless sea out there and I am sure if you are not familiar with the market terms of trading instruments, the world can seem a little scary.
Apart from Stocks and share, you must have heard of people trading in foreign exchange or forex. Spanning the global boundaries, Forex is an easy to trade trading instrument. What are the different types of financial instruments you can trade in? With the multiple variants of financial instruments available, they are broadly categorized into two major categories
Cash Financial Instruments
Known as a prime type of financial instruments, the market is flooded with cash instrument options. Identified as instruments whose value is determined linked to the markets, the certificates of deposits, bills of exchange, interbank loans, commercial papers are known as Cash instrument types.
Some of the cash instruments like certificates of deposits can be traded in the secondary market but the interbank deposits are non-negotiable.
A derivative instrument is known to derive its value from the underlying asset. It can have one or more assets under it. These assets are basically the deferential factor of the sell and buy price. The assets can be bonds, stocks, commodities or more. A classic example of Derivative instruments if a CFD. Derivatives instruments fall into three major categories.
- Equity-based like stocks
- Debt based like bonds
- Over-the-counter (OTC)
Two types of Derivative Instruments are available in market
a) Lock Products
These products are basically a contract that promises the capital and interest return on the investment at end of the term
b) Option Products
In option products, no contract is entered but the owner is entitled to certain product benefits.
Multiple variants of Derivative instruments are available in the trading market they are categorized as the Long-term and short-term debt based instruments. The long-term debts based instruments are majorly Bonds or securities that offer dividends to the holders. The bonds can be government or corporate bonds and certain bonds interest earnings are nontaxable. The short-term debt based instruments are securities like T-bills.
It actually gets confusing with so many options for financial instruments. What is the need of so many types arises from the investor tastes of trading? The market has witnessed that some of the investors want to invest in secure and assured return instruments for long-term while some of them are the risk takers and go for forex type trading that is more prone to speculative gains.
Investors close to retirement phase prefer to invest in bonds and securities that offer better and promised returns as compared to shares that are volatile. On a need basis, the financial instrument variants are growing day by day. These instruments are focused on helping the investors invest inflexible engagement models and as per the returns they desire.