Today, individuals working with forex online brokers have numerous financial vehicles they can trade. The trader should want to work with a broker that will give them several options when it comes to the financial products that they can trade. Presently, many forex brokers offer financial products such as CFDs, currencies, shares, indices and commodities. A traders portfolio does not typically go in an upward direction, and the more diversified the trader is the more balanced their portfolio will be.
Again, the list of financial products offered from online broker to online broker varies and some of the most popular products offered to trade are; CFDs, currencies, shares, indices and commodities.
A CFD is also known as a contract for difference. A contract for difference, are what forex traders consider a leveraged derivative vehicle. The reason why CFDs are considered leveraged vehicles is that their benefit is derived from the value of another resource.
Typically, when investors trade CFDs, they are betting on the change in the price of the underlying asset during a specified period of time. Again, the trader is betting on whether the price of the underlying asset will increase or decrease in the future.
What exactly is an indices/index? An index is a financial product which is comprised of a large group of publicly traded companies and the price of the index is determined based on an average securities price of the entire group. Similar to trading a single security the forex trader when trading an index has the ability to buy and sell the index as if they were purchasing the individual security. Examples of indices are; the Dow 30, S&P 500, NASDAQ, SmallCap 2000, S&P 500 VIX, DAX and Nikkei225.
Commodities are raw materials which are extracted from the Earth. There are numerous commodities which are traded on the open markets and through forex brokers. Examples of some of these commodities are; crude oil, coffee, agriculture, wheat, soybeans, corn, copper, cotton etc. Typically, commodities meet the following criteria; they are tradable, deliverable and are liquid.
Forex or currencies trading is the largest traded financial product in the world. There are over 5 trilliondollars’ worth of forex transactions which take place daily throughout the world. The term used as forex also means foreign exchange and the term forex is used globally.
Shares or what are also know as securities are a single unit of investment within an individual company. The exchanges which trade shares are open to the public to trade, however, a stock exchange in one country may not allow an investor to trade that security from their native country directly.
There is a great deal of variations between the products which a trader can trade. The difference between stocks/shares and CFDs is that when a trader utilizes CFDs as a trading vehicle they are not investing/trading the underlying asset and don’t own the underlying share/s. In addition, when utilizing CFDs the investor has the ability to leverage their position significantly. When trading CFDs the trader is utilizing margin which means that there is no requirement to tie up the total market value and purchasing the equivalent share position.
When trading an indices/index compared to a share there are vast differences. An index such as the Dow 30 is made up of individual stocks within the index. So, instead of a trader purchasing shares directly in stocks such as American Express or Apple, they have the opportunity to purchase all of the stocks which make up the index at a single time. In addition, there are formulas which are used to create an index. The Dow 30 is what would be considered a price-weighted index. Shares which comprise the index are given a greater weight within the index the higher the price of the share of the company.
In closing, the world of investing can be quite complex and the more the individual trader understands the financial vehicle they are trading the better off they will be.