Trading Markets
Which Markets Should You Trade?
Advances in technology have led to many innovations in the financial markets. Traders nowadays have a wide array of markets to trade the best assets globally. These available assets differ in various aspects such as trading conditions, capital requirements, liquidity, volatility, and trading hours. This means that it is very important for investors to choose the right market to trade their preferred assets. For any investor, a good trading market should be flexible and convenient and offer a suitable risk/reward ratio. Ultimately, a good trading market should match your risk appetite as well as offer you the chance to realize your investing or trading ambitions.
Here are some of the different types of markets and their features:
Forex Market
With over $6 trillion in daily trading volumes, the forex trading market is the largest financial market in the world. The forex market allows market participants to exchange different currencies at an agreed price. The forex market does not have a centralized location or an exchange, with parties interacting in an over-the-counter (OTC) manner. Participants range from large financial institutions and central banks to major investors and retail individuals. The market is conducted and sustained by a global network of banks stationed in 4 major financial centers across the world: London, Tokyo, New York, and Sydney. This effectively means that the market is open round the clock during weekdays.
The only asset traded or exchanged in the forex market is money. A typical forex transaction will involve the simultaneous buying of one currency and the selling of another. The idea is to buy a strong currency against a weaker one or sell a weak currency against a stronger one. For retail investors, forex trading is available online via CFD brokers. In this way, forex traders can trade the exchange rates of numerous currency pairs. Forex rates are usually influenced by various factors such as central bank’s interventions, news reports, market sentiment, and economic data.
Pros
- 24/5 hour market
- Leveraged trading
- Low trading costs
- High liquidity
- Easy short selling
- Potential for high profits
Cons
- High volatility
- High market risks
- Leveraged risks
Stocks Market
The stock trading market allows investors to buy and sell shares of publicly traded companies. The stock market is one of the oldest and most popular financial markets in the world, and over the years, it has helped numerous investors to get a slice of the profits made by the biggest corporations. Shares are units of ownership of a company and they can be easily bought or sold in stock exchanges.
In addition to shares, stock exchanges also list bonds, indices, and other securities. In previous years, the buying and selling of shares were largely manual and done face-to-face with participants exchanging share certificates. But technology has revolutionized the stock trading market, with everything now practically done electronically. Some of the biggest stock exchanges in the world include the New York Stock Exchange, London Stock Exchange, and the Tokyo Stock Exchange.
Stock market participants include large institutions, such as insurance companies and hedge funds, retail investors, and listed companies trading their own shares. For retail investors, the stock market is the easiest way to get a share of these companies and potentially enjoy the gains generated by them, such as Microsoft, Facebook and Amazon.
Pros
- High capital gains
- Passive income (dividends)
- Grow with the economy
- High liquidity
- Wide range of stocks to choose from
Cons
- Volatility
- Stock picking is tough
- Relatively higher fees and commissions (even taxes)
- Limited control over assets (underlying companies)
CFDs Market
CFDs Market has grown in popularity among retail traders due to its ease of access and simplicity. The market allows investors to speculate on the prices of their preferred financial assets without owning them. Access to the CFD trading market is facilitated by brokers who stream live prices of different types of financial assets.
A CFD (contract for difference) is a contract between a trader and the broker to pay the difference between the entry and exit prices of an underlying financial asset. A trader will earn the difference in the form of profits if their price prediction is right, however, they will pay the difference in the form of losses if their price prediction is wrong.
The allure of CFDs is leverage, but the market can also be used by investors to hedge against market risks in the main market. To achieve efficient CFD trading, it is important to deal with a good CFD broker. A reputable and reliable broker should be regulated, stream transparent asset prices, provide relevant and effective trading resources and tools, offer intuitive trading platforms, as well as provide excellent support.
Pros
- Low capital requirements
- Potential for high returns
- Wide asset selection
- Leveraged trading
- Low trading costs
- Go long or go short
Cons
- High market risks
- Leverage risk
- No ownership of underlying assets
Cryptocurrency Market
The cryptocurrency market has emerged as a new and potentially lucrative financial market that cannot be ignored. Cryptocurrencies are a new form of digital money that exists purely as computer code. They are powered by revolutionary blockchain technology. Cryptocurrencies are stored in digital wallets and can be bought and sold on crypto exchanges.
The cryptocurrency trading market is decentralized, which means that it is not controlled by any entity or government. The potential of the cryptocurrency market came to the fore in 2017 when Bitcoin (the first-ever cryptocurrency) saw its price rise to about $20,000 from less than $1 in 2008. There are now numerous cryptocurrencies available to investors and they continue to offer abnormal returns within short periods.
The cryptocurrency market is gaining traction and offers varied opportunities. New coins and tokens are being launched (ICOs) regularly, while established coins are also undertaking big innovations to improve their speed and scalability. For traders, there is the opportunity to HODL (holding coins for the long term) for capital gains as well as the option to day trade for short-term gains. Additionally, crypto coins tend to undergo the process of hard forks, when a blockchain variant of a cryptocurrency splits from the parent blockchain, usually generating the same amount of tokens on a new blockchain. This can be viewed as a kind of dividend for HODLing crypto coins about to undergo a hard fork.
Pros
- Potential for very high returns
- Wide selection of coins
- Growing acceptance
- 24/7 trading (even weekends)
Cons
- Unregulated
- High risks
- High volatility
- Wallets may be compromised
ETFs Market
ETF – an exchange-traded fund is an investment fund that holds a basket of securities, such as stocks, commodities, or bonds. They operate just like mutual funds, but they are readily tradeable in exchanges just like stocks. ETF shares represent a stake in the ownership of a portfolio selected by professional fund managers.
For many retail investors, ETFs are an easy way to seek the benefits of a diversified portfolio as well as to gain exposure to specific sectors, asset classes, or even entire geographical regions. Because they trade on exchanges, ETFs have excellent liquidity throughout market open hours.
ETFs are known to be very flexible, and they can be customized or structured to meet the diverse needs of investors. There are thematic ETFs designed to focus on emerging or disruptive trends such as COVID-19, the gig economy, cannabis, eCommerce, climate change, and cloud computing. Additionally, ETFs are also available for leveraged trading, making them even more lucrative, yet more risky.
Pros
- Easy to trade
- Offers Diversification
- Tax-efficient
- Dividend Yields
- Leveraged Trading
Cons
- Commissions can limit capital gains
- Illiquid ETFs can have very high spreads
- Lower dividend yields
Bonds Market
The bonds market is the largest securities market, bigger than even the popular stocks trading market. The bond market allows participants to issue or trade debt securities. Bond issuers are usually governments, companies, and municipalities that issue bonds when they need capital to finance their operations or start new projects.
The bond market is segmented into two: the primary market when participants issue new debt; and the secondary market where previously issued debt securities can be bought and sold.
Bondholders (investors) receive a predetermined coupon (interest) periodically until the bond maturity date when they receive their full principal amount. However, bonds can be bought and sold before maturity at prevailing market prices. Because they are less volatile than other markets, bonds serve an important role in a portfolio. They help in capital preservation, provide steady passive income, and can help hedge against a slowing economy.
Pros
- Predictable returns
- Less volatile
- Low risk
- Credit ratings help with analyzing risks
Cons
- Low returns
- Relatively low liquidity
- Bonds are vulnerable to interest rate changes
- Typically require high capital amounts
Options Market
Options are contracts that give investors the right (but not obligation) to buy or sell an underlying asset at a specified price on or before a predetermined date. The underlying assets can be stocks, commodities, currencies or even indices. The options trading market allows for leveraged trading of option contracts as well as other practical investing advantages, such as risk control. Risk is controlled because as their name suggests, options give investors the ‘right’ to buy or sell, but not the ‘obligation’ to exercise the contract.
All types of options contracts involve a writer (option seller) who grants rights to a taker (option buyer) in exchange for a premium (a payment to cover the cost of the option contract). There are generally two broad types of options contracts: call options and put options. A call option gives you the right to buy a certain amount of the underlying asset at a specified price within a certain period. To buy a call option, an investor will pay a premium which serves as a down payment for the contract. On the other hand, a put option gives you the right to sell a certain amount of the underlying asset at a specified price within a predetermined period. The flexibility of options contracts in conjunction with the ability to choose different expiration dates creates numerous options trading strategies for traders of different proficiency levels.
Pros
- Leveraged trading
- Options can be used to hedge other markets
- High potential returns
- More strategies available for trading setups
Cons
- High commissions
- Time limit (decay)
- Leverage swings
Different markets have different characteristics that may suit various types of investors. At AvaTrade, investors have a choice of markets to trade such as Forex pairs, CFDs on stocks, bonds, ETFs, commodities and crypto-fiat pairs, and FX Options.
Sign up today and trade your preferred markets now!