WHICH FINANCIAL INSTRUMENTS SHOULD ONE TRADE?

A trader who embarks upon his trading journey is more often than not perplexed by this question. With so many choices and each financial instrument offering different levels of excitement and flurry, a trader often gets confused in choosing the right instrument.

Should he choose equities or futures or options? Should he trade commodities or currency?

The fundamental objective of every trader is to earn money off his trades and any financial instrument which helps him achieve his objective in the best possible manner would be the logical choice.

But before one decides what he will trade, a trader has to arrive at a financial goal and the time he is willing to wait for his goal to be achieved. The next question would be the amount of capital he is willing to trade with and the amount he is willing to risk. Once these factors are decided he has to then look at each instrument carefully to see which one meets the desired criteria.

Hypothetically, let us say that a trader wishes to achieve a 100% return on his capital.

Trading in equities would allow him to achieve this objective in a time period of two years to five years.

Trading in futures (stocks, currency, and commodities) would bring down this time frame to a year

Trading in options would bring down this time frame even further and would help him achieve his financial objective in a month!

The logical deduction thus would be that the trader should trade in derivatives to capitalize on his gains in the fastest possible time.

This hypothesis is based on the assumption that trade is moving in the desired direction.

What would happen if the trade did not move in the desired direction?

A trade taken using equities would reduce in value no doubt but the trader would still hold a stake in the company to be capitalized at a later date. He would also be entitled to dividends and bonuses from the company whenever stipulated.

A trade taken in the futures segment would result in the trader losing an amount in proportion to the extent of the undesired move which could be as much as 50%.

A trade taken in the options segment could result in the trader losing the entire capital.

Thus a trader must weigh these pros and cons before setting up his mind to trade a particular financial instrument.

Be it equities, futures or options, every instrument has favorable and an unfavorable side. A deep insight into all the above factors would help a person to choose an instrument that suits his needs and requirements.

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