When it comes to trading online, there are sometimes so many instruments that it is easy for somebody to lose their way and get distracted. There are traditional assets as well as those that are derivatives on these assets.
Trading should not just be reserved for those professional managed account traders who use complicated investment algorithms to price all of these products. Retail investors should also take time to understand these products to a greater degree if they wanted to indeed profit from them.
In this relatively short post, we will go through some of the most well-known investment products and how you would be able to make the most of them.
Type 1: Retail Forex
This is one of the most well know types of investment products and has been traded in the retail space online for a number of years. Online forex trading involves buying currency (FX) and holding it in an account at a retail brokerage.
When you buy retail forex, there is no leverage involved. You are not using any funds to buy on margin. You are merely buying and selling the underlying currency and holding it in your investment account.
This is also one of the easiest types of investment products to trade as you know exactly what you are buying. They are usually denominated in the currency of the country where you opened the account.
If you are new to trading and don’t want to take the risk with a margin type product then trading retail forex could be for you. Yet, even if you are just starting out it would be advisable that you take the time to practice trading on a demo account of sort.
Type 2: CFDs
CFDs (Contracts for Difference) are investments that can be written on any underlying asset such as equity, forex or commodities. They are essentially derivative instruments that are taken out on margin and are marked to market every day.
Given that people are able to trade CFDs on margin, this means that there is considerably more risk (and reward). If the asset moves in the right direction then you can earn multiples of your initial investment. Of course, if this happens in the opposite direction you can lose your invested capital.
However, if you have strong discipline and are able to keep your trading risk controlled with appropriate stops, CFDs could be for you. They are also relatively easy instruments to understand. This is because their pay-out structure is straightforward. Either the investment will increase or decrease in value.
Type 3: Options
These are slightly more complex instruments as their pay-out structure is not so easily defined. Essentially, options are derivatives that give the holder the right but not the obligation to buy or sell an underlying asset. Some traders like them because of their asymmetric payoff structure.
These instruments are also driven by a number of different factors such as volatility, time to expiry, interest rates and Strike price. These types of investments are used more by large investment institutions in Wall Street who are able to structure them.
However, they are offered by some retail brokers such as IQ Option and other regulated brokers. You can read more about it in this IQ Option review.
Type 4: Binary Options
These are a different type of investment option. They are ones in which the payoff is defined as either being 0 or 1 (100). In other words, the investor will either make 100 or they will lose the premium that they invested with the instrument.
It operates in the same way as a traditional option in the sense that there is a strike price, entry price and expiry time. Yet, the amount that the investor is likely to gain or lose is known from the outset. The trader just has to decide whether they would like to enter a CALL (price increase) or PUT (price decrease).
This is also an investment instrument that can be used for a number of different investment strategies. These include nearly all trading strategies that have asymmetric results in them such as price action events like economic announcements.
Binary Options have also come under quite a bit of scrutiny recently given the number of brokers who have taken clients for a ride and refused to allow them to withdraw. It is for this reason that you have to be certain that the broker that you are about to use is regulated and offers easy same day withdrawals.
Type 5: Digital Contracts
Digital contracts relatively new investment instruments on the market. Essentially, they are a combination of a CFD and a Binary Option. They are contracts that one makes and enters either into a CALL or a PUT option. Yet, unlike a Binary Option, there are numerous different strike levels and the trader can also exit the trade prior to expiry.
These are also less risky than a CFD because the trader does not have unlimited risk. There is the price of the digital contract that is the most that they will lose on the downside is only limited to the initial investment.
They are also convenient instrument to trade if you were a trader that made use technical trading levels. For example, if you were monitoring whether an asset will break a resistance or support level then you can enter a number of different digital contract trades at different levels. Some will be more likely to profit than others hence, these will pay off the cost of those contracts that are indeed far out of the money.