Financial Instruments
Market traders, internet giants, pharmaceutical businesses and pretty much all businesses in a capitalist economy are all just trying to sell something for more than it cost. Traders are no different but instead of flowers, information or drugs they trade financial instruments. Anyone that wants to make money from trading, needs to really understand what it is they are trading.
The Three Layers of Financial Instruments
| Contracts |
| Cash or derivative |
| Asset class |
First, all financial instruments are contracts. They need to be contracts to be enforceable.
Second, financial instruments are either cash or derivatives. A cash instrument has its price determined directly by a market – for example buying and selling shares on an exchange (for cash, hence the name). A derivative’s price is determined by an underlying asset. There are lots of derivative markets, like options or spread bets or cfds.
Third, all financial instruments are categorized in a particular asset class: equities, foreign exchange, commodities and debt.
- There are three layers to a financial instrument: contract, cash or derivative and asset class.
- Spread bets and CFDs are derivative instruments.
- A derivative’s price is determined by an underlying asset, a trader isn’t trading that underlying asset directly.
- Never trade an instrument you don’t understand.
