What are Trading Instruments?
Trading instruments comprise all the different types of assets and markets that can be traded. Trading instruments are classified into various categories, some more popular than others. They range from equities and forward contracts to indices, currencies, and more.
The Most Popular Trading Instruments
Popular trading instruments usually see high trading volumes daily. They include:
Stocks are investments in a company that changes in value depending on its performance. Stocks are traded on stock exchanges. A single stock is often referred to as a “share,” and buying a share makes the investor a shareholder in the company.
2. Exchange-Traded Funds (ETFs)
An exchange-traded fund (ETF) is a basket of assets that is traded on the stock exchange. ETFs track the value of the securities they own. There are several different types of ETFs, ranging from metal ETFs to technology stock ETFs and more.
3. Futures Contracts
Futures contracts are standardized contracts (i.e., fixed quantity, price, and delivery location) that serve as a legal agreement to buy a particular asset at a fixed price in the future. Most commonly, futures contracts are used for trading commodities, such as soybean, cocoa, crude oil, and more.
4. Forward Contracts
Forward contracts are slightly different from futures contracts in that they are customizable, unlike futures contracts that are standardized. They are commonly used to hedge and reduce risk from other investments.
Options contracts give the buyer the right to buy or sell an asset at an agreed-upon date and price. Call options provide the option to buy, whereas put options provide the option to sell. Unlike a futures contract, an options contract does not oblige the buyer to buy or sell.
6. Currency Derivatives
Currency derivatives refer to futures, forwards, and options contracts that trade a particular currency. They are commonly used by forex traders that trade based on currency fluctuations.
Metals like gold, silver, and copper not only serve as assets for futures contracts but also as trading instruments themselves. The trading of physical metals – especially the precious metals gold and silver – is quite common.
8. Contract For Differences (CFDs)
A contract for difference (CFD) refers to an agreement between two parties to trade on financial instruments based on the difference between the entry prices and closing prices.
Are Trading Instruments Regulated?
In the U.S., most trading instruments are regulated by the Securities and Exchange Commission (SEC), which monitors trading instruments and the compliance of companies involved in trading. Notably, contracts for differences are banned by the SEC.
Examples of Trading Instruments
1. Futures Contracts
WTI Crude Oil Futures Contract (CME)
- Unit: 1,000 barrels
- Prices in U.S. dollars and cents per barrel
- Settlement Method: Deliverable
Copper Futures (CME)
- Unit: 25,000 pounds
- Prices in U.S. dollars and cents per pound
- Settlement Method: Deliverable
3. Exchange-traded Funds
- SPDR S&P 500 (SPY) – Tracks the performance of the S&P 500
- iShares Silver Trust (SLV) – Tracks the performance of physical silver
- ARK Innovation ETF – Tracks the performance of select technology stocks
A (hypothetical) Apple (AAPL) Call Option
- Strike price: $160
- Maturity date: February 23, 2021
A (hypothetical) Tesla (TSLA) Put Option
- Strike price: $350
- Maturity date: March 15, 2021
CFI offers the Capital Markets & Securities Analyst (CMSA)® certification program for those looking to take their careers to the next level. To keep learning and advance your career, the following resources will be helpful: