Asset Classes – Understanding the Assets You Trade.

Assets are basically what all the fuss is about in trading. They are the underlying securities that traders purchase and they come in four flavours: currency pairs, commodities, stocks and indices.

One of the significant advantages that binary options have over other financial instruments is that binary traders are not tied to one specific asset class. When purchasing a binary option you can select among any of the four classes, whereas with other trading platforms like Forex you can only place trades on currency pairs.

Before locking-in a trade you should be familiar with the asset class you have selected, which is why we created this page for you.

Currency Pairs

Currencies are the most liquid market on the planet. Every day currency trades worth 4 trillion dollars are transacted on the world's markets. Currencies are traded in pairs, so for example the Euro U.S dollar pair is represented as EUR/USD. The way a currency pair works is by comparing the performance of one currency against the other. The first currency in the pair is known as the “base” currency and the second one is referred to as the “quote” currency. In the above example the Euro is the currency of interest, so when charting price movement it is the value of the Euro against the U.S Dollar that the graph is displaying. The figures quoted (for example 1.30) express how much of the quote currency it costs to purchase one unit of the base currency, so in this case $1.30.

Commodities

Commodities are materials such as gold, oil and wheat, that are traded daily on the world's commodity exchanges. An important feature of all commodities is that in order to be traded they must be interchangeable between producers, this means they have to be of the same standard regardless of their place of origin. In other words an ounce of gold or a barrel of oil should be the same wherever it is purchased from. The basic standard that a commodity has to meet is called a basis grade. Commodities are bought and sold as futures contracts and the exchanges they are traded on are responsible for setting this basis grade for each one. Commodities are enormously important as they are the raw materials that manufacturers need to create products and ship them across the globe. They are also very closely linked to the wealth of the countries that produce them and have a powerful effect on the value of all other asset classes.

Stocks

Stocks have a reputation for being particularly attractive securities, this is because they have been shown to consistently outperform other asset classes in the long term. Stocks are a financial instruments that allow investors to purchase stakes in a particular company. These are tantamount to owning a piece of the company's assets and earnings. There are two types of stocks that are traded on the world's stock markets, common and preferred, the difference between them being that preferred stockholders have more of a claim on a company's earnings and assets than common stock holders, and receive dividends before common stockholders. They and are also the first to be paid out in the event of liquidation. Investment portfolios are usually mostly composed of stocks. They are also very attractive to binary traders as they lend themselves particularly well to the application of fundamental analysis.

Indices

 

Indices are usually the asset that beginners have the most trouble understanding, however they are not as complicated as they may initially appear. An index is essentially a statistical average of all or part of the individual assets that make up a certain market. They work like a fantasy portfolio of securities belonging to a country or region, with each one having its own method of calculation that results in a single value. This value is based on how the aggregated performance of all the assets (stocks and bonds) comprising that index perform in relation to a certain base value. Technically an index is not something that can be purchased as it is just the mean performance of a number of other securities. Nevertheless the data is used to create derivative instruments that are sold by mutual funds and exchange-traded funds. The Standard and Poor's 500 and MSCI Emerging Markets Index are two of the best known and most traded indices.

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George Milios

George Milios is the founder of onlineforextrading.net, the binary options and forex news portal which is dedicated to providing you with all the information you need to successfully trade.

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