Summary:
Asset classes, like commodities, indices, and Forex pairs, represent different types of investments with unique characteristics. Each asset class has its own market behavior, level of liquidity, and volatility, influencing traders’ decisions. Popular classes include Forex, commodities, indices, and crypto.
Main Points:
- Forex Pairs: Highly liquid, very large market with constant trading.
- Commodities: Diversifies assets; high volatility.
- Indices: Track market sectors; generally lower risk.
- Crypto: High volatility, attractive for its growth and market potential.
- Asset choice depends on a trader’s interests, strategy, and risk tolerance.
The definition of asset classes is pretty simple. An asset class is a type of asset, like commodities or Forex currency pairs. These assets share certain qualities, fall under the same regulations, and are traded on the same markets.
What’s more interesting about asset classes is how they behave in their markets. Asset classes like indices, Forex pairs, and crypto all have special attributes. And those attributes can make each asset class more or less attractive to traders.
In Chapter 7 of our guide, we covered the psychology of trading and how to manage emotion and bias as a trader. Now, we’re looking at the actual assets and markets to which trading psychology applies.
So, what are the most popular types of asset classes, and what sets them apart from each other? Keep reading to learn more about investment asset classes.
A Brief Overview of Asset Classes: What is an Asset Class?
As we mentioned, asset classes aren’t very hard to understand. An asset class is simply a group of assets that have similar qualities and are regulated in the same way.
They are normally traded on the same market. However, some asset classes, like real estate, are not traded on a market in the same way as commodities, indices, Forex pairs, and many other types of assets.
Here’s a very practical way of recognizing different asset classes: Every trading market represents an asset class. The stock market for stocks, the bond market for bonds, and so on.
As Investopedia points out, there are traditional asset classes (like stocks and bonds) and alternative asset classes (like crypto and real estate). Stocks, bonds, and similar assets are very liquid, meaning they’re very easy to trade. Alternative assets are less liquid, making them harder but by no means impossible to trade.
Learn more about the types of assets traders can trade with a FundedNext account.
Popular Types of Asset Classes
For traders just getting into trading, here is a classification of the most common asset classes:
Forex Pairs
A Forex pair, like USD/GBP, represents two currencies and the exchange rate between them. For USD/GBP, the quote price explains how many pounds are needed to buy one US dollar. Another way to look at Forex trading is the simultaneous buying and selling of two types of currency, as Babypips explains.
The Forex market is the single largest asset market, with 24-hour trading five days a week. Forex is very liquid with moderate to high volatility, with politics, business, and the market itself influencing trading. Forex is a popular asset class to trade because of the long market hours and chances to earn a profit in both up and down markets.
Commodities
Commodities are basic goods, like metals, crops, and oil, that are traded before reaching their markets and being used. They are an alternative asset class, however, they have very large markets and many are traded regularly. Some commodities are more liquid than others, and the market overall is very volatile.
This asset class is attractive to traders because it helps with diversifying assets and has steady global demand. However, this market also includes a lot of risk.
Indices
Indices are assets that track the price changes in a group of stocks, bonds, and some other asset classes. They give traders the chance to trade an entire market or sector. These assets are generally very liquid with a large market and have low to medium volatility.
Traders like this asset class because it can offer lower risk in some contexts, and because it can be easier to track and anticipate broad market movements as compared to single assets.
Crypto
In the big picture, crypto pairs are very similar to regular Forex pairs. The difference is that instead of national currencies, crypto pairs include two types of crypto, or one cryptocurrency and one national currency.
The crypto market isn’t as big as the Forex market, although it is growing very quickly. Major crypto pairs tend to have higher liquidity, while it’s lower for minor pairs. Overall, the crypto market is highly volatile. The overall nature of the crypto market is attractive to some traders, as is the volatility.
Choosing the Assets You Want to Trade
The many types of asset classes mean there is something for nearly every type of trader. The market size, volatility, and liquidity of each asset may be attractive or a sign to look for another type of asset class to trade.
Only you can decide which asset classes to trade. It’s a personal decision that should be based on your interests, overall approach to trading, and appetite for risk. However, this guide can help you learn more about different types of assets and what makes each unique from the rest.
Trading with FundedNext
Now that we’ve covered asset classes, the next chapter in our guide will be a round-up: A glossary of trading terms and answers to common questions about trading.
Ready to start trading? Find the right trading account for you at FundedNext! Compare challenges and sign up today.
