Futures and other financial derivatives, This category
includes futures contracts, the forex market, options, and an
expanding array of financial derivatives. Things are further complicated by the expansion in available
investments. Exchange-traded funds (ETFs), for example, are traded
like stocks on equity exchanges, but ETFs may be composed of
investments from one or more of the five basic asset classes. An
ETF that offers exposure to the gold market may be partly
composed of investments in gold bullion and partly composed of
stock shares of gold mining companies.
The other reason to have a basic understanding of asset classes is
just to help your recognize the nature of various investments that
you may choose to trade. For example, you might choose to devote
all, or nearly all, of your investment capital to trading futures or
other financial derivatives, such as foreign currency exchange
(forex). But if you do, you ought to at least be aware that you have
chosen to trade a class of assets that is usually considered to carry
significantly more risk than bonds or equities.
#On the other hand, if you’re blessed with a high risk tolerance
and/or having money to burn, you may care very little about
diversification, being more focused on trying to correctly identify
the asset class that currently offers the highest potential profits.
#1. Dealers (also known as the over-the-counter market)
Although stockbrokers do still input orders for clients, the stock
market is no longer truly a brokered market, having transitioned to
operating as an automated exchange. Trades are executed based
on order books that match buyers with sellers.
The advantage of an exchange is the provision of a central location
for buyers and sellers to find counterparties. Exchanges are used
for all manner of securities, but are most appropriate for
standardized securities such as stocks, bonds, futures contracts,
and options. Exchanges typically specify the characteristics for
securities that are traded on the exchange.
