Your guide to trading in primary instruments

Sarah Parker
Authored by Sarah Parker
Posted: Friday, June 18, 2021 - 09:03

On the financial market you can trade in an array of different instruments, known at their fundamental level as primary instruments. The price of a primary instrument is determined by its market value, which can fluctuate significantly because of the volatility of the financial market. Some of the most highly traded financial instruments are currency, stocks and bonds.

Primary instruments are the standard when it comes to trading on the financial market and therefore, they can be a great first investment for a newcomer investor. It’s easy to open a trade on the financial market since the majority of trades take place online, for example with Plus500 stock trading you could open a position on the market today and start your investment journey. However, before you consider embarking on such a journey, you’ll need to have a solid understanding of how to trade and the risks involved, so to get you started, here’s a guide to trading in primary instruments.

Currency – foreign exchange

Currencies are traded on the foreign exchange (forex) market globally, and it is one of the most actively traded instruments in the world, seeing almost $6.6 billion worth of transactions take place each day. Like any financial market, the forex market is volatile and can be dramatically affected by political, economic and unprecedented events that take place worldwide.

Currencies are traded in pairs, referred to aptly as currency pairs. The value of a currency is therefore derived by comparing it to another, for example, one highly traded pair is sterling against the US dollar (GBP/USD). In this instance, the value of the pound is based upon the dollar and therefore, the pound would be referred to as the base currency and the dollar represents the counter/quote currency. Therefore, if the pound was valued at 1.125, this would mean that in order to purchase one pound, you would require 1.125 dollars.

Trading in pairs enables traders to speculate on the value of two nation’s currencies and use this data, along with additional technical and fundamental analysis, in order to plan ahead and make well-informed decisions based upon the findings.

Stock

Trading in stocks is effectively an investment in the shares of a chosen business. You could buy shares of some of the global giants like Amazon (AMZN) or Google (GOOGL), or find a smaller, upcoming stock that could be one to watch for the future. This will provide you with a small stake of the company’s earnings and assets, which can prove to be a great way to make a return on your investment. However, like with any investment, the stock market fluctuates greatly and therefore can pose a great risk of making losses, if you don’t conduct thorough research and understand the factors that can cause prices to change.

As a general rule of thumb, you should try to buy a stock as close to its buy point as possible. This price level is the point at which the stock is believed to be most likely to increase in value and therefore, provides the greatest chances of making a profit. 

Bonds

Bonds are a primary instrument that can work effectively as part of a long-term investment strategy, since returns can be small but consistent. As an investment opportunity, government bonds can prove to be a lower risk trade than other instruments, since the bond market tends to experience lower volatility levels and dramatic price movements than that of the stock market, for example.

To start trading in bonds you will be required to set up an account with a leveraged provider. Once you have done so, you will need to deposit some of your capital in order to open a position on the market. A provider will give you the option to open a contract for difference (CFD) trading account or a spread betting account, although you can open both if you wish.

You can trade in global bonds on an online trading site, which makes it possible to purchase government bonds that pay out in an alternate currency to your own nation, providing you with a vast array of trading opportunities.