It’s hard to quantify the full value of the world’s financial markets, but a quick glance at individual sectors offers at least a little context. For example, the global bond markets increased their cumulative value to $105.9 trillion this year, while the worldwide equity market’s capitalisation soared by 2.8% to an impressive $95 billion.
Such huge markets are driven by various instruments, which are defined as types of financial medium that are used for borrowing purposes in specific sectors.
OK, we hear you ask, but what are the most important financial instruments to keep in mind when trading? Here are a few to keep in mind:
- An Exchange-traded Fund
Commonly referred to as ETFs, exchange-traded funds are open-ended investment entities that have the unique characteristic of being traded at time of the day.
ETFs will often attempt to duplicate stellar stock market indices such as the S&P 500, in a bid to offer natural diversification to traders and afford them access to a wide range of high performance assets.
In general terms, ETFs tend to gain strength as the United States Dollar (USD) weakens in the forex marketplace, usually against a raft of other major currencies including the British pound (GBP) and the Japanese Yen (JPY).
In this respect, ETFs may also replicate the performance of major currencies against the usually dominant greenback, and there’s no doubt that certain funds can track price fluctuations amongst fiat currencies over time and allow for insightful speculation.
- Forward Contract
Forward contract trading effectively refers to an agreement established between two opposing parties, wherein a particular asset is bought, sold or traded at a predetermined price.
With this trading instrument, there’s no exchange of money until the pre-established future date has arrived, and because of this they’re commonly used as hedging instruments to either deter or alleviate risk in investment activity.
This is part of the vast and lucrative derivatives marketplace, which is valued at over $1 quadrillion globally and continues to be driven by large scale forward contracts and high profile ETFs.
Futures trading is similar to this in its nature, as it refers to a type of forward transaction that contains standard contract sizes and maturity dates. Interest amounts are also included in any viable futures contract, while this type of instrument is traded on specific and designated exchanges.
This is commonly shortened from the trading term ‘FX Option’, which is linked directly to foreign exchange trading.
Also part of the aforementioned derivatives marketplace (where the value of instruments fluctuates based on underlying variables), options allow participants to exchange one currency for another at a predetermined rate and date.
This is an incredibly popular financial instrument, and one that drives the enduring popularity of the forex market. Remember, this is the largest single entity of its type in the world, and one that sees over $6.6 trillion traded globally every single day.