Understanding Different Asset Types

Theresa Krakowski on Jun 24, 2024

When thinking about trading and investing, many people default to thinking about the stock market. But did you know that it’s the smallest of all the financial markets?  The following is a description of the main asset classes, how they are used, and a few pros and cons of each.

 What are the different asset types – Stocks, Options, Forex, Futures?

To my mind, the different asset classes (Stocks, Options, Forex, and Futures) are just different types of “marketplaces”.   When you shop for anything (clothes, electronics, appliances, automobiles, etc.) you can locate comparable products in a variety of marketplaces and “choose your shopping adventure”.   The financial markets offer similar diversity.  

  • Stocks are like Boutique/Specialty Shops
  • Options are like Warehouse (club, bulk), Thrift, Liquidation
  • [Spot] Forex is like a World Market (not the retail store . . . think bazaar, used car dealerships; places where you can ‘negotiate’ what is best for all parties at this moment)
  • Futures are like Home Improvement/Crafts, Art Supplies (raw materials)

 How do they apply to an investor and how do they apply to a trader?

To me, a “trader” wants to be ‘in and out’ of the market in a relatively short period of time and an investor is somebody who wants the longer-term ‘buy and hold’ experience.

The Stocks, Forex, and Futures markets require “price movement” (regardless of whether it's up or down) to make your participation generate a gain/loss.  Each of these markets does experience exciting moves from time to time and can be used by “traders”. Stocks and Forex generally tend to be slower moving markets which also make them suitable for “investors”.    

The Options market offers strategies that can result in gains/losses even when price movement is lackluster and doing nothing (a frequent scenario) which makes this market extremely attractive to use for longer-term investments, including protection and preservation.

 What are the top 3 pros/cons of each?

  • Stocks
    • Pros
      • Provides diversification opportunities (large/small companies, domestic/international, sectors).
      • Can be used for short term income or long-term growth objectives.
    • Cons
      • The market is only open for a short time providing limited (6.5) hours of trading time.
      • Gap risk which occurs when the price of a stock changes without any trading in between, often when the market is closed.
      • $25K minimum balance for day traders.
  • Options
    • Pros
      • Leverage: you can control more shares for a lesser amount of money than in the stock market.
      • More opportunities are available for multi-directional price movement.
      • Provides the ability to implement strategies designed for downside protection.
    • Cons
      • $25K minimum balance for day traders; less important for long-term investors.
      • Can be a more complex asset class with a lot of “moving parts” to learn.
  • Forex
    • Pros
      • Leverage and low commissions (sometimes just spread).
      • Low barrier to entry; you can start trading with a minimal capital.
      • The forex market is open 24 hours a day due to it being conducted in different parts of the world, allowing for a more flexible trading schedule.
    • Cons
      • The market is not centralized so there is no oversight body controlling prices and the actions of many participants.
      • Forex brokers are often trading against you. 
  • Futures
    • Pros
      • Leverage and low commissions.
      • The market is centralized so investors see only the available prices.
      • The futures market is open 24 hours a day in different parts of the world, allowing for a more flexible trading schedule.
    • Cons
      • Contract expiration dates need to be managed.
      • Some contracts require that the underlying asset be delivered rather than traded. 

In a recent survey* Trading Academy students reported that they trade and invest across a range of these asset classes with more than two thirds (69%) describing their experience before joining the Academy as “novice” or “no experience.” 

Of course, all trading and investing involves risk, and you can lose money, which is why Trading Academy’s education starts with risk management first and builds on that foundation.