“Asset Classes

 > Explanatory Article by Marios Kyriakou, MSc Economics


About the author: Marios Kyriakou has a bachelor’s degree in Economics from the University of Cyprus and a master’s degree in Economics from the University of Warwick. He is also a holder of CySEC’s Advanced Certificate in Financial Services Legal Framework and a professional in Online Trading, Forex and CFDs with more than 7 years of experience.

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<Last updated 25.04.2020>

Dear reader,

Hi! If you are interested in online trading you should read the below that provides important explanation about the different asset classes.

 

In online trading you come across with different asset classes. CFDs follow the underlying assets that can be forex/currency pairs, indices, shares, metals, energy, agriculture products, crypto.

 

What are the different currency pairs?

> Majors are currency pairs with the largest trading volume e.g. EURUSD ,GBPUSD(cable), USDJPY, USDCAD (loonie)

> Minors are currencies with lower trading volume e.g. EURAUD, GBPJPY, USDNZD

> Crosses are usually currency pairings not quoted in EUR or USD e.g. AUDNZD, CADJPY, GBPCHF

The majors are the most liquid so the spread is lower than the other categories. Minors are less liquid than majors and more liquid than crosses.

 

What are the different commodities?

>Gold, Silver, Oil, Wheat, Coffee, Sugar, Pork Bellies!

Priced in their own individual way, Metals-Troy Oz, Oil-barrels, Wheat- Bushel. Commodities are in their own asset class and integral part of financial markets.

CFD brokers offer CFDs usually for spot GOLD and OIL but there are also CFDs following the prices of the future contracts of these commodities.

 

What are futures?

> Futures Market – This is where futures contracts are traded.

The World’s oldest futures exchange is the Chicago Board of Trade, it was founded in 1848 by 82 Chicago merchants. The first contracts to be traded were for flour.

Futures Contract is a legally binding agreement between two parties to buy or sell an underlying asset sometime in the future. The Quantity of the asset is fixed. The delivery or expiry date are also fixed.

 

What are Forwards?

A Contract that is highly customizable between a buyer and a seller for a specified asset at a specified price on a future date.

Forward Transaction (Currency)- a mutual agreement to purchase or sell one currency for another at an agreed upon rate (forward rate), for a defined amount and at a defined date (forward date). The forward rate is independent of the rate on the day of settlement and is calculated at the time by supply and demand. The forward rate is calculated using the spot rate and the differences in the interest rates of the two currencies for that period.

Example: Taking a loan out in EUR at 0.5% transferring that money to Australia and depositing in a bank there where you receive 3.5% for 12 months. Hence you receive 3% gain on the interest rate. Main reason for forwards is to hedge against currency fluctuations.

 

What are Indices?

An index is used to measure the performance of particular market or asset. Do you know any? Dow Jones (DJIA), Nasdaq, Nikkei, FTSE, DAX.
U.S. Dollar Index (DXY), Volatility Index (VIX). Index trading viewed as safer for investors but can be just as volatile.

> The Dow Jones Industrial Average, Dow Jones, or simply the Dow or (WallStreet Index), is a stock market index that measures the stock performance of 30 large companies listed on stock exchanges in the United States. How large is a company? How do we measure it?

Using market capitalization to show the size of a company is important because company size is a basic determinant of various characteristics in which investors are interested, including risk. It is also easy to calculate. A company with 20 million shares selling at $100 a share would have a market cap of $2 billion. It is defined as the total market value of all outstanding shares.

The value of the index is the sum of the price of one share of stock for each component company divided by a factor which changes whenever one of the component stocks has a stock split or stock dividend, so as to generate a consistent value for the index. A study between the correlation of components of the Dow Jones Industrial Average compared with the movement of the index finds that the correlation is higher when the stocks are declining.

>The NASDAQ-100 is a stock market index made up of 103 equity securities issued by 100 of the largest non-financial companies listed on the Nasdaq stock market. It is a modified capitalization-weighted index. The stocks’ weights in the index are based on their market capitalization, with certain rules capping the influence of the largest components. The financial companies were put in a separate index, the NASDAQ Financial-100.

>The Nikkei 225, more commonly called the Nikkei, the Nikkei index, or the Nikkei Stock Average, is a stock market index for the Tokyo Stock Exchange. It is a price-weighted index, operating in the Japanese Yen (JP¥). The Nikkei measures the performance of 225 large, publicly owned companies in Japan from a wide array of industry sectors.

>The Financial Times Stock Exchange 100 Index, also called the FTSE 100 Index, FTSE 100, FTSE, or, informally, the “Footsie”, is a share index of the 100 companies listed on the London Stock Exchange with the highest market capitalization. FTSE 100 companies represent about 81% of the entire market capitalisation of the London Stock Exchange

>DAX is a blue chip stock market index consisting of the 30 major German companies trading on the Frankfurt Stock Exchange. Prices are taken from the Xetra trading venue.


 

“I hope I am clear on this one. If not, contact us on social media and we will do our best to help you.

Thank you for reading my articles and watching my videos.”

Marios Kyriakou

Disclaimer: This article is intended for educational purposes only and does not replace independent professional judgement. Its purpose is to act as a complementary educational service to society, promoting personal development and social, economic and cultural progress of citizens. While this content has been prepared in good faith, no representation or warranty, express or implied, is or will be made and no responsibility or liability is or will be accepted by the creator to the accuracy or completeness of the information presented or any other written or oral information made available to any interested party and any such liability is expressly disclaimed.
Risk Warning: Trading in Forex and Contracts for Difference (CFDs), which are leveraged products involves substantial risk of loss as there is considerable exposure to risk in any off-exchange transaction, including, but not limited to, leverage, creditworthiness, limited regulatory protection and market volatility that may substantially affect the price, or liquidity of the markets that you are trading. You should carefully consider your investment objectives, level of experience and risk appetite before making a decision to trade with us. Most importantly, do not invest money you cannot afford to lose. It is possible to lose all the initial capital invested.

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