Before enrolling oneself on trade, one should know well about Australia’s financial instruments and how can one earn well through them. Every newbie investor needs to invest in time and energy to understand the terms and concepts before taking the plunge.
Here are six things to check out before choosing any financial instrument for investing:
Know about financial instruments
A financial instrument refers to a monetary contract or deal between two distinct parties, which is then traded and settled through different asset classes. The contract is indicative of an asset to the buyer and a liability to the seller.
Financial instruments are held in asset classes that refer to a specific form and structure like commodities, shares, derivatives or bonds. These financial instruments can be distinguished based on their asset class and sub-divided into complex or non-complex categories.
Understand complex and non-complex financial instruments
Expert traders usually use complex financial instruments, and derivatives are the most popular of them all. The derivatives can be structured in the form of CFDs, futures, and options. Every derivative has its advantages. For instance, CFDs are good for investors’ hedging funds. Traders like to get familiar with nuances before trading on them. Non-complex financial instruments, on the other hand, can be easily traded by newbies who do not have ample knowledge. They bank on initial investments and rely on fund managers to invest on their behalf and derive sizeable returns. Shares, equity and debt securities are non-complex investment funds.
What do equity and debt securities include?
Equity securities indicate shares of different companies, while debt securities could include corporate and government bonds (preferred stock and collateralised securities). These securities are part of investment funds that also include popular mutual funds. They enable investors to park their money under expert investors and specialists who manage funds efficiently for the best returns. The manager makes investment decisions while the investors earn their profits based on fund performance.
What are index futures and options?
Index futures and options allow investors with maximum exposure to movements in Australian indices under a single transaction, allowing investors to invest or divest in the largest stocks of the country without having actually to buy or sell shares. The use of index futures hence can drastically reduce transaction and brokerage costs.
Benefits of trading on futures and options
- Leverage: Undertake large position for small initial outlays
- Reduced costs: Enables private investors to invest in Australian equities at a fraction of the costs.
- Make money from the market going up or down: Benefit from trades in futures and options when they go up and even when these markets go down.
For instance, Investors buying SPI futures when the market can rise and selling them when expected to fall leads to profit in their favour. Traditional stock markets necessitate investors to borrow stock at considerable costs. Futures and options reduce the costs and complications involved.
How can you invest in futures and options for maximum profitability?
Futures and options provide traders with flexibility and the opportunity to make the most of present trends and market variations, regardless of market direction. They benefit in times where investors are uncertain about market performance and thus trade on options to defer their decision until the expiry of the trade to form a clear view of market direction. This limits losses for buyers of options to the paid premium only.
By considering the afore-mentioned 6 points about financial instruments, beginners can choose the right instrument for their needs. It is advisable to rely on expert traders and consultants before trading in the Australian stock market, including futures and options.
