Education

Traded asset classes


Trading is something we believe everyone should learn, it allows you to take full control of your money and for those looking to make a career for themselves, that is why we offer free trading signals. But there are many asset classes to consider when trading, and there are specific functions and reasons for traded asset classes and why you would trade them. So, how do you know which asset class to trade? More importantly, when to trade that asset class.

Here, we are going to outline, each of the most commonly traded asset classes:

Each of these asset classes have specific characteristics and functions in the markets. It’s important to understand them and to know why you are trading them, as without this knowledge you may end up trading them at the wrong time and or, for the wrong reason.

So, let’s take a look at the first:

Commodities

Whether you are speaking about food, energy or of course metals, commodities form a very important part of everyday life. Anyone who for example, drives a car can become very aware of what a fluctuation in the oil prices might have on their drive to the office daily.

Or let’s say the impact of heavy rain, as was seen in Spain, during 2016, when the supply of lettuce was disrupted to due to the crops being ruined and there for the supply couldn’t meet the demand for UK restaurant owners that relied on the delivery of these crops and so the price for lettuce, of course, went up as the there was a limited amount in that period that was below normal.

Commodities can be an important way to diversify your portfolio beyond traditional trading. Either for long term trading or a place to invest when there is more market risk and you want to invest in say, gold during an economic crisis.

The two most important factors when looking to trade commodities are the:


  • Supply and demand factors that typically drive the commodity markets
  • The season for each commodity.

What we mean by this is that there are certain times in the year when one commodity may be more favourable than another, take the example of Silver, during the Christmas season it is common to offer jewellery to loved ones, family and friends, and typically silver is a high demand driven metal during or just before this period as producers of jewellery look to stock up on as much as they can at the cheapest price before the season begins.

Stocks

Stocks are a great way to invest because typically because it’s a way to set aside money while you are busy with your life and have that money work for you so you can enjoy the fruits of your hard labour in the future. As the companies, you will typically invest in have owners, and those owners have an interest in the company doing well, and exceeding its share price, but all you have to do is invest in them and let them do the hard work for you.

Look, the goal of investing is to just make your money your employee and to work for you, so you can think of it in this way. When you buy a share of stock in a company you typically own a small piece of that company you’re buying into. What this means is essential if the company does well and earns money so do you.

So, let’s say, during a period of lockdown as we are seeing today with the coronavirus, many people are staying home. What this forces people to do is seek entertainment from the comfort of their homes, well, on the company, in particular, comes to mind and this is Netflix. During the periods of lockdowns when people can’t go out you can expect that the number of Netflix subscriptions goes up as people see to pass the time and those who were normally to busy to be at home watching are now signing up, therefore the profit expectations are to be higher than usual so if you had this thought in mind you would invest in Netflix by buying shares and benefiting from the higher prices.

Stocks are all about identifying what people want and what is in demand, what is popular and of course what is not. Because not only can you buy stock in companies you can also sell, which means to bet against the company you think is performing badly or may be impacted by the likes of one industry when it is doing well.

There are many ways to find stocks to trade but typically individuals, especially those new to trading, tend to invest in companies they like and use. Which is the most simplified way to do it but believe it or not it also tends to work because if they know it and use it it is likely their friend do and therefore there is a large demand in those companies

Currencies

Currency trading or what it is more commonly known as forex is a great asset class for short term day trading, there are plenty of moves that can take place in a day and typically trades 24/5 so wherever you are in the world you can take advantage of the market in your currency of choice that best suits your time. Or if you like to trade dollar-based pairs but live in Australia you may be faced with trading these pairs outside of any normal working hours in your country.

The forex market is the largest, and most liquid market in the world with literally trillions of dollars changing between countries every day. There is no central location for this asset, instead its trades through a network of banks and institutions.

Now it is not just traders who sit around trading currencies all day, there are also the needs of companies to purchase let’s say rubber from another country to produce tyres in theirs. Therefore, to conduct that transaction they might also seek to have a reserve of that currency at a time it was cheaper so that in the future if prices go higher that can save money on their purchase. If they have not done this and heavy volumes of purchases to that currency are done on the same day, this may affect the price of the currency and of course the overall interest based on the economic factors

When you trade Currencies, you buy or sell a currency and profit from the potential movement in price in your favour.

When do you trade each asset class and why?

As outlined previously, there are certain factors that determine why trading each asset class might be better at specific times or because of specific events. Let us say for example you want to trade Commodities, firstly you need to decide which commodity. Would it be metals or energy? If you chose energy, then is it during a time going into winter where the price of natural gas may go up due to the higher demand factors as a country buys up reserves for households in the winter. In this case, you may consider long term trading this asset as this trade could run for a few weeks to a couple of months.

Stocks may be your choice of trading because you don’t have a lot of time available to be sitting in front of charts, you also don’t want to go through all the economic events leading to buying or selling certain commodities so, therefore, you decide to go with buying stocks for the long term, but now consider why you’re buying the stock and with everything going on in the world right now is it the right time to be buying one company over the other? And when dealing with stocks consider when their earnings are being released so you can determine when to buy or sell the company to maximise your profit potential.

Currency trading on the other hand, you may want to trade on a more full-time basis day trading through technical analysis and price action. But then it is a case of deciding whether you are a swing trader, position trader, day trader or scalper.

What some traders decide to do is a combination of all the asset classes and they do this by dividing up their money and trading some in the commodities market, at the same time buying one or two companies they like and seek to protect their investments by short term trading forex to build up their balance and reduce the risk of the open positions in the other two assets classes.

This is where you have the freedom and opportunity to decide what works best for you and largely it will depend on your style of trading and lifestyle. If you are a more frequent trader, your likely to trade forex the most as this tends to be a better market for short term trader. If you believe you can spot opportunities where oil is undervalued because your profession allows you to understand the oil market you may select to trade commodities long term. Or you can choose to trade both commodities and stocks and generally metals and the stock market tend to move in opposite directions


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