The financial industry has expanded rapidly in the past few years. For example, cryptocurrencies have grown to a $2 trillion asset in a short period. Other assets like leveraged tokens and fan token offerings (FTO) have also emerged.
Therefore, with all these assets, how do you choose the ones to trade? Traders often find it difficult to select their preferred assets to trade.
In this article, we will look at the different types of assets and some of the leading strategies for selecting them.
Types of financial assets
There area number of financial assets that are offered by trading companies. Each type has its different unique assets. So, here are some of the most popular types of assets and their sub-categories.
Forex, or foreign exchange, is a financial asset that lets traders benefit from the movement of different currency pairs. Examples of these pairs are EUR/USD, USD/JPY, and NZD/USD among others.
Currency pairs come in different types. First, there are forex majors, which are made up of developed world currencies that have the US dollar. These are EUR/USD, USD/CAD, and USD/CHF among others.
Second, there are forex minors, which are currency pairs made up of developed country currencies that don’t have the US dollar. These ones include the EUR/CHF and EUR/GBP.
Finally, there are exotic pairs that are made up of emerging market and developed country currencies. Examples are USD/TRY and EUR/ZAR.
In most cases, majors are more liquid than the other two. Most importantly, they have thinner spreads, which makes it cheaper for the trader.
These are raw materials that are used to manufacture other items. Their main characteristic is that they are tangible financial assets. They are divided into:
- Precious metals - These are commodities like gold, silver, platinum, and palladium.
- Base metals - These are metals used in the industrial sector. They include copper and aluminium.
- Agricultural commodities - These are products like wheat, cotton, corn, and soybeans.
- Energy - These are commodities used to produce energy like crude oil, natural gas, and heating oil.
These are shares of companies that are publicly traded. There are now thousands of shares in the United States and around the world. These stocks can be characterized into several categories like technology, consumer staples, consumer discretionary, energy, and financials.
Each of these companies have different characteristics. For example, technology stocks are known for their growth while energy firms are known for their low valuations.
» Related: How to analyze stocks
Other types of common assets in the market are:
- Exchange Traded Funds (ETFs) - These are funds that track a basket of assets like stocks and bonds.
- Cryptocurrencies - These are assets like Bitcoin, Ethereum, and Ripple.
- Indices - These are financial assets like the Dow Jones, German DAX, and CAC 40.
So, here are some of the most important factors to consider when selecting a financial asset to trade.
Yourself, as trader
Time is an important part of trading the financial market. In most cases, most traders do it on a part-time basis because they are usually occupied with their jobs. Therefore, in this case, it might be a bit difficult to trade stocks, which are offered only during the day.
In this case, you can decide to focus on other assets that are available on a 24-hour basis like forex, futures, and cryptocurrency.
Alternatively, you can use multiple strategies to trade stocks. For example, you can decide to be a swing trader, where you are focused on the medium-term. In this case, you can buy a stock with the hope of holding it for a few days.
Alternatively, you can focus on setting pending orders for the following day especially during the earnings season. For example, if a stock is trading at $10, you expect it to either rise or fall sharply after it publishes its results. Therefore, you can set bracket orders to take advantage of these movements.
Your trading style
Another thing to consider when thinking of assets to trade is your trading style. Some of the most popular styles in the market are scalping, swing trading, and even investing.
Scalping involves buying and selling assets within a very short period while swing trading is where one buys assets and holds them for a few days. Investing is where you buy and hold them for a long period.
As you will find out, some assets are better for swing trading while others are great for investing. A good example of this is exchange-traded funds (ETFs). ETFs are usually better for investing because they are usually less volatile.
Similarly, some cryptocurrencies and forex pairs are usually better for traders because of their volatility. Therefore, figure out your trading style when selecting the best asset to trade.
Your risk-profile and volatility
A risk-profile refers to your level of taking risk. Some traders are usually more risk-averse, meaning that they are not comfortable with taking a lot of risks. If you are one of these, it is recommended that you focus on assets that are seen as less riskier such as those that pay a dividend. These traders are also more comfortable with being position traders.
» Related: Knowing Your Risk-Reward Ratio
On the other hand, some traders are more aggressive and are open to take more risks. Therefore, these ones can focus on more volatile assets like digital currencies and meme stocks like GameStop and Bed Bath and Beyond.
This is where most traders start to mess up. Instead of trading assets that they are well-aware of, they specialize on assets they know nothing about. It is not uncommon to see a trader who knows a lot about currencies start to open trades on complex derivatives like weather and interest rates swaps.
Instead of doing this, you need to trade on assets that you have a good understanding about. In fact, it is possible for you to make a lot of money by focusing on just one security.
The financial markets
Another factor to consider is known as liquidity. It refers to how easily an asset is traded in the market. For example, in the cryptocurrency industry, an asset like Bitcoin is known for its liquidity.
The same cannot be said of other cryptocurrencies like PolyPad, HiBlocks, and 88mph that have a tiny market cap.
The same is true in other assets. For example, while a currency pair like the EUR/USD is highly liquid, others like NOK/ZAR and HUF/TRY are significantly illiquid. Therefore, you will often pay more money in terms of spread to trade these pairs.
Similarly, stocks like Apple and Microsoft are highly liquid because of the volume that is traded every day. This is unlike other penny stocks.
The price action of a security is very important. A security whose price is not moving is often not a good one because it will not make you any money.
On the other hand, a security whose price is trending is usually the best. A trend can be an upward or downward movement in a security.
When the price is moving upwards, the trader has two choices:
- He can enter the trade and make money when the price moves up. They can also short a security whose price is moving lower.
- He can wait for a reversal.
In finance, there are always reversals. The difficulty in this is to find the exact point where the security will reverse itself. In this, many people have made the mistake of timing the market.
Another important factor to consider when selecting an asset to trade is the available or the upcoming economic data. In most cases, it is recommended that you trade assets that have economic data coming their way especially when you are focused on forex pairs.
In most cases, these pairs will tend to show significant volatility, and thus more trading opportunities. Some of the most important economic numbers to focus on are manufacturing and services PMI, non-farm payrolls (NFP), and retail sales numbers.
In this article, we have looked at some of the most popular things to consider when looking for assets to trade in the market. You should focus on assets that are highly liquid and those that have significant news. Most importantly, you should opt for assets that you are comfortable with.
External useful resources
- Financial Navigating in the Current Economy: Ten Things to Consider Before You Make Investing Decisions - SEC