Have you ever thought before you go into forex trading that there are four classes of financial assets you must know so that you will be prepared to go live trading the forex market? If not, then, these four classes of financial assets are good to be considered before you trade the forex market. Of course, these four will certainly be helpful if you know it because it is linked to your psychological conditions in which if you cannot stand in the first class, then, you might not be able to stand the forex market.
1. Mutual Fund
The first class of financial asset class, that is, a mutual fund is an asset that has the lowest risk among the four financial assets. By definition, Hayes from Investopedia (2022) wrote that a mutual fund is where money is collected from investors in which that money will then be invested in other types of assets such as bonds and stocks.
A mutual fund has the lowest risk among the four types of financial assets because in this asset your money is managed by the manager who works in a company depending on what mutual fund you choose, for example, you bought the mutual fund managed by the A company, then, your money will then be managed by the manager in the A company that specializes in managing investors' money.
2. Stock
Stock in the financial asset is where you can buy a share of a particular company you have chosen to be a part of your portfolio. In definition from The Economic Times, a stock is a term that is commonly used for stating the ownership in a form of a certificate. This can be, for example, you want to buy a share of Indofood company (Indonesia) which has INDF code in it, and then after you buy it through the security you get a statement of proof of ownership and the amount shares of ownership.
Overall, the stock has a higher risk than a mutual fund because in the stock market there are hundred or even thousands of stocks you have to screen first that fit with your strategy and in this asset class you have to manage your portfolio on your own which is unlike mutual fund where your money is managed by a professional manager. So if you happen to see your portfolio in minus and you cannot stand it, then it is better to choose a mutual fund first, particularly the lowest risk type of mutual fund.
3. Forex
Now come into forex which has a higher risk than stock. Forex in a simple definition is a foreign exchange where you exchange one currency for another currency. For example, you trade EURUSD in which you buy EUR using USD if the price is 1.10000, it means that if you buy EURUSD, then, you are buying 1 EUR by the price of 1.10000 USD.
Trading the forex market requires you to have knowledge of the market movement. That is why, it is better to make yourself get used to the stock market first (the way you handle your loss) because in forex if you are trading through a forex broker, you are a retail trader in which you have to be aware of where you should put your stop loss and take profit target because it is of essence to know these two things.
4. Cryptocurrency
Okay, this financial asset is clearly a booming asset as you all know that after the covid-19 pandemic attacked us all, cryptocurrency arose like a flower that has just bloomed. However, what is cryptocurrency? Well, according to Kaspersky, cryptocurrency is a digital currency that exists in which the currency uses a secure method of the transaction by using cryptography.
Cryptocurrency itself is a bit controversial because the system is decentralized, unlike the conventional bank which has a centralized system, and because of that many states at first go against cryptocurrency (we will see later the future of cryptocurrency). Aside from its controversy, cryptocurrency itself has higher volatility than forex, for example, just take a look at the bitcoin chart in which from 2019 at around $3000 reached the highest at around $65000 in 2021. Due to its high volatility, cryptocurrency is considered as the highest risk of a financial asset (at the current time, cryptocurrency is regarded as an asset class but we will see later about the future of cryptocurrency).
Conclusion
These four classes of financial assets are certainly a good knowledge to be considered whether you are ready to trade forex or not because if you cannot stand the losing position in a stock mutual fund or in the stock market, then, you may not be ready to handle the losing position that will occur in the forex market as the volatility of this market is high. Moreover, there is this new asset class (for now it is regarded as an asset class in some countries) because the booming price went up during the covid-19 pandemic, that is a cryptocurrency that you may want to consider to trade if you have understood the forex market.
Written by Andre I.
References
Hayes, Adam. 2022. Mutual Fund. Retrieved from Investopedia. (Accessed 9 March 2022): https://www.investopedia.com/terms/m/mutualfund.asp#:~:text=A%20mutual%20fund%20is%20a,market%20instruments%2C%20and%20other%20assets.
Kaspersky. What is cryptocurrency and how does it work?. Retrieved from Kaspersky. (Accessed 10 March 2022): https://www.kaspersky.com/resource-center/definitions/what-is-cryptocurrency
The Economic Times. Definition of 'Stocks'. Retrieved from The Economic Times. (Accessed 10 March 2022): https://economictimes.indiatimes.com/definition/stocks