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Lesson 3: Instruments Traded in Financial Markets
Financial markets are where traders and investors buy and sell a wide range of instruments — each serving a unique purpose. Some help companies raise capital, others offer income or a hedge against risk. To trade confidently, you need to understand what you're actually trading.
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15 min read

By the end of this lesson, you'll understand:

  • The different types of financial instruments
  • How each one works and what it’s used for
  • The potential rewards and risks of each


1. Stocks (Equities)

Stocks represent ownership in a company. When you buy a stock, you become a shareholder — entitled to a share of the company’s profits and potentially voting rights.

Types of Stocks:

  • Common Stocks: Voting rights + variable dividends.
  • Preferred Stocks: Fixed dividends, no voting rights.
  • Blue-Chip Stocks: Large, reliable companies like Apple or Coca-Cola.

Why Trade Stocks?

  • Growth: Stock prices can rise over time.
  • Income: Some pay regular dividends.
  • Ownership: You become part-owner of the business.

2. Bonds

A bond is a loan you give to a company or government. In return, they agree to pay you back with interest over time. Bonds are typically lower-risk than stocks.

Types of Bonds:

  • Government Bonds: Safer, lower returns (e.g., U.S. Treasuries).
  • Corporate Bonds: Higher returns but riskier.
  • Municipal Bonds: Issued by cities, often with tax benefits.

Why Trade Bonds?

  • Stable Income: Regular interest payments.
  • Diversification: Helps reduce overall risk in a portfolio.
    Safety: Less volatile than stocks.

3. Commodities

These are physical goods traded in bulk — from gold to soybeans. Their prices are influenced by global supply and demand.

Categories:

  • Energy: Crude oil, natural gas
  • Metals: Gold, silver, copper
  • Agriculture: Wheat, coffee, corn

Why Trade Commodities?

  • Hedge against inflation
  • Profit from price swings
    React to real-world events (e.g., droughts, wars)


4. Derivatives

Derivatives are contracts based on the value of something else — like a stock or commodity. You don’t own the asset; you’re just betting on its price.

Common Types:

  • Futures: Agree to buy/sell later at a set price.
  • Options: Right (not obligation) to buy/sell at a set price.
  • Swaps: Exchange cash flows (used by big institutions).

Uses:

  • Hedging: Protect against risk (e.g., airlines hedge fuel prices).
  • Speculation: Profit from price changes with smaller capital.

5. CFDs (Contracts for Difference)

CFDs are derivative products that let traders speculate on price movements without owning the asset.

Key Features:

  • No ownership: You never own the stock, crypto, or commodity.
    Go long or short: Profit from rising or falling prices.
  • Leverage: Control a large position with less capital — but higher risk.

Why Use CFDs?

  • Access multiple markets from one platform.
  • Trade with leverage — but be cautious.
  • Short selling made easy.

6. Forex (Foreign Exchange)

Forex is the global market for currency trading — like USD vs EUR. It’s the largest and most liquid market in the world.

How It Works:

  • Currencies are traded in pairs (e.g., EUR/USD).
  • Prices move based on economic news, interest rates, and geopolitics.
  • Most trading is short-term and speculative.

Why Trade Forex?

  • High liquidity: Trade any time, 24/5.
  • Tight spreads: Low costs.
  • Leverage-friendly: But volatile, so risk management is key.

Key Takeaways

Each financial instrument serves a different purpose and suits a different type of investor.

Stocks offer ownership in companies and are ideal for those seeking long-term growth and dividends. They carry medium to high risk, depending on the market and the company.

Bonds are better suited for conservative investors or those nearing retirement. They provide stable income through interest payments and are generally considered lower risk than stocks.

Commodities like gold or oil are popular among active traders who want to hedge against inflation or profit from price swings. These markets can be highly volatile and carry a high level of risk.

Derivatives are advanced tools used for hedging or speculative purposes. Because they are complex and highly leveraged, they are best left to experienced traders and institutions.

CFDs (Contracts for Difference) allow traders to speculate on asset prices with leverage. They’re suited for short-term traders comfortable with high risk and fast-moving markets.

Forex, or foreign exchange trading, involves currency pairs and appeals to day traders who follow global news and economic events. It's highly liquid, fast-paced, and carries significant risk due to leverage and volatility.