When faced with this question, most people will tend to think about the different things that financial traders might like to invest in, whether that’s foreign exchange (forex), commodities like gold and silver, or stocks and shares. What’s not often thought about, are the different ways of trading them; it’s not all about simply buying and selling set amounts of things.
Here are some of the most common:
Spot Trades – Spot trades refer to forex or commodity trades in which currency or commodities are bought or sold at an agreed price, with the settlement occurring on the spot date, which is usually two days in the future. These are very widespread, and more than a third of all forex transactions are spot trades.
Options – An option is a contract which allows a trader to buy or sell an asset at an agreed price, on or before a future date, which is also specified. Again, this is a very popular way of trading, and is used with a huge range of instruments.
Futures – Futures are similar to options in that a future transaction is agreed, but the major difference is that the contract is binding. Rather than having the option to buy or sell, it is an obligation; the contract must be fulfilled as it is set out.
CFDs – Contracts for difference are an agreement whereby the seller will pay the buyer the difference between an asset’s current value, and the value at the time the contract position is closed. They are available on numerous instruments and underlying assets, but they are not available in all countries. CFDs are also traded over the counter (OTC), which means that they are exchanged between a trader and a broker, rather than through the supervision of an exchange. There can be various types of CFD because of this.
Spread Betting – Spread betting is similar to the use of CFDs in that it is not available everywhere, and it’s done OTC, but otherwise it is a unique way of trading. A spread bet involves wagering money on each percentage point that the price of an asset moves up or down by.
There are many other ways of trading financial assets, but these are the main ones that you’re likely to encounter. Each one can be suited to a different situation, asset or preference for risk and reward.