There are many types of financial trading available, e.g. trading stocks, bonds, currencies, commodities, and derivatives in various markets. Within each type, different strategies can be employed to further cater to varying risk tolerances, time horizons, and other preferences. Below, we will take a look at a few examples of common types of financial trading.
Financial trading offers a wide range of opportunities. From traditional stock and bond investing to the highly speculative world of cryptocurrencies and CFDs, investors must carefully assess their goals, risk tolerance, and market knowledge before choosing which type of financial trading suits them best. Each form of trading requires distinct strategies and expertise, and it’s crucial to understand the nuances of each market before diving in.
Stock Trading
Stock trading involves buying and selling shares, normally of publicly traded companies. When you purchase a stock, you own a small fraction of the company, giving you rights to a portion of its profits and assets. Stock traders attempt to profit from price changes in these shares, and/or from dividend payments. A dividend payment is when a stock company pays out part of its profits to its owners, i.e. to the shareholders. Not all stock companies make dividend payments, so if this is an important part your strategy, you will need how to identify the right companies.
Bond Trading
Bond trading involves buying and selling debt securities issued by governments, corporations or certain other entities. When you buy a bond, you are essentially lending money to the issuer in exchange for periodic interest payments and the return of the principal at maturity.
Bonds are typically less volatile than stocks, making them attractive to conservative investors and those looking to balance a portfolio. Bond traders often speculate on general interest rate movements, as rising interest rates (e.g. because the central bank is raising its rate) can reduce the value of existing bonds and vice versa.
Exactly how risky a bond is considered to be depends on the credithworthiness of the issuer. Government bond yields are therefore critial indicators of economic confidence and investor sentiment for the country that issued the bond.
Exemple: A governmental bond issued by the United Kingdom is typically considered less risky than a governmental bond issued by Argentina, and investors will demand a higher interest rate to consider Argentinian bonds.
Commodities Trading
Commodities trading involves trading physical goods like gold, silver, oil, and agricultural products. Speculative commodities trading is typically carried out using derivatives, e.g. a Futures Contract based on gold or coffee. For derivatives, the deal is always cash settled, and you do not have the right to actually demand physical delivery of the underlying commodity.
Examples of commodities that are popular for speculation
- Agricultural commodities, such as corn, wheat, cocoa, coffee, and broilers.
- Energies, such as Brent crude oil, WTI crude oil, and natural gas.
- Metals, such as gold, silver, platinum, palladium, copper, zink, and aluminium.
Commodity price movements can be highly unpredictable due to the volatility of supply and demand factors, weather, geopolitical events, and market speculation.
Forex Trading
Forex trading (foreign exchange trading) involves the buying and selling of currencies. The goal is to profit from changes in the exchange rates between two currencies. The forex market is the largest and most liquid market in the world, operating 24 hours a day during weekdays.
Traders speculate on currency pairs, such as EUR/USD or GBP/JPY, aiming to predict whether one currency will strengthen or weaken relative to another. Forex trading is often conducted using leverage, which allows traders to control larger positions with smaller capital.
Just as with other types of trading, forex traders often use derivatives for forex speculation.
Cryptocurrency Trading
Cryptocurrency trading involves speculating on the price of digital currencies like Bitcoin, Ethereum, or Ripple. Cryptocurrencies are decentralized, digital assets that operate on blockchain technology. Cryptocurrency trading can involve trading one cryptocurrency for another (e.g. BTC/ ETH) or trading pairs that consist of one cryptocurrency and one government-issued currency (e.g. BTC/USD or ETH/GBP).
Traders can buy and sell cryptocurrencies through specialized cryptocurrency trading platforms online, such as Kraken and Coinbase. It is also possible to use derivatives, e.g. Contracts for Difference (CFDs) to speculate on cryptocurrency. There are many traditional brokers that offer derivatives based on cryptocurrency even though you can not actually buy, owns and sell cryptocurrency through them. Derivatives are a convenient solutions for traders who want exposure to cryptocurrency without actually owning any cryptocurrency.
Cryptocurrency trading is highly volatile and requires careful risk management.
Options Trading
Options trading is a form of derivative trading where traders buy or sell contracts that give them the right, but not the obligation, to buy (call option) or sell (put option) an underlying asset at a specific price before a specified date.
Options allow traders to speculate on price movements of stocks or other assets with less capital than buying the asset outright. Options can also be used for hedging—protecting an existing investment from potential losses. However, options trading is complex and carries a higher risk than regular stock trading.
The standard type of option used for speculation is always cash-settled. You will not have any right to demand delivery of the underlying asset, e.g. 100 shares in a company.
Futures Trading
Futures trading involves the buying and selling of standardized contracts to purchase or sell a specific asset (e.g a commodity) at a future date for a price agreed upon today. Futures contracts are used for both speculation and hedging.
For example, an airline company might buy futures contracts for airplane fuel to lock in a price and protect against rising fuel costs, while a speculator might buy futures contracts hoping to profit from price changes before the contract expires.
Futures trading requires deep knowledge of the asset and can result in substantial gains or losses, especially when the trade is highly leveraged.
CFD Trading
CFD trading (Contract for Difference) allows traders to speculate on the price movements of various assets (e.g. stocks, commodities, currencies) without owning the underlying asset. Just as with other derivatives, CFDs can also be used to speculate on the movements of something non-tangible, e.g. a stock index.
CFDs are offered with leverage, meaning traders can take larger positions than their actual capital would allow, amplifying both profits and losses.
CFD traders make profits or losses based on the difference in price between when a contract is opened and closed. The contract is between the trader and the broker – there are no other traders involved. With CFD trading, your broker will therefore be both your broker and your counterpart in each trade, which creates a conflict of interest.
Examples of common trading strategies
Day Trading
Day traders buy and sell within the same trading day, often holding positions for just minutes or hours. This strategy relies on taking advantage of short-term price movements. A day trader will always close all open positions before the trading day is over.
Scalping
This is a subset of daytrading. A scalper opens and closes a very large number of positions in a short period of time, hoping to profit from very small price movements. The percentual profit on each individual profitable trade is not big, but scalping can produce very large profits when you look at all the individual profits combined – especially if each trade involves a big amount of money.
Swing Trading
Swing trading is somewhere between daytrading and positoin trading. A swing trader will keep positions open over night, but will typically close positions within days or weeks instead of keeping them long-term.
Position Trading
Position traders hold positions for longer periods, ranging from weeks or months to years, with the goal of benefiting from long-term growth. Position trading is often simply called investing. Position traders often favour fundamental analysis over technical analysis.
Arbitrage
Arbitrage trading is when you aim to profit from the fact that the same asset (e.g. a stock) has a slightly different price on two different markets.