Asset Classes Explained:
Forex, Shares, Indices, Commodities, ETFs and CFDs

When learning about financial markets, Forex, shares, indices, commodities, ETFs and CFDs will frequently come up in the same context; however, these instruments refer to different categories of market instrument.

Forex, shares, indices, and commodities represent market categories or underlying markets. ETFs and CFDs represent product structures through which an investor may gain an exposure to one or more of the underlying markets. As distinct categories each has different features, pricing methods, ownership arrangements, trading hours and risks.

To successfully build your basic market knowledge it is important for you to understand the differences between the underlying markets and the different product structures available for making your investments. This guide provides you with an overview of how each category of instrument functions at a high level by however focusing on key points to consider in relation to each financial instrument prior to purchasing any financial instrument will make it easier for you to understand the basics.

What Is an Asset Class?

Asset class means a type of financial product that has a common characteristic.

Equities are considered stock, because they represent an ownership interest in a company. Currencies are designated as foreign currency products. Commodities include gold and oil, and agricultural products, which are also included as commodities.

Some financial instruments can represent multiple asset classes. For example, an ETF may include stocks, bonds, value and/or any combination of those item types. Similarly, a CFD can move in price according to the movement of any of these asset classes, without giving you title to any of these asset classes.

There are two different ways to describe the classification system used for these products:

Forex

Forex stands for foreign exchange where there is a big global market to trade currencies between different countries.

When you trade currency, you see them paired together in letters such as the Euro (EUR) with the US Dollar (USD). The price reflects how many dollars it costs to buy 1 euro (EUR/USD).

What Can Influence Forex Prices?

Factors Influencing Currency Prices in Forex Trading

There are numerous elements that can change the price of any currency including:

• Decisions made by Central Banks on Interest Rates
• Reports on Inflation
• Reports from Bureau of Labor Statistics on Employment
• Communication from Central Banks
• Changes in Political Leadership
• International Trade Status
• Economic Activity of the Currency Pair Being Traded

Foreign Exchange (FX) Trading is an international marketplace with many financial centers open for trading week long but can be set at varied times and may have differing products available to suppliers and/or country of origin.

Shares

Equity (also referred to as equity) is a type of investment in a corporation owned by shareholders. When a corporation issues shares, it creates units representing ownership of that corporation. You can buy or sell shares indirectly via an exchange, with the price determined by supply and demand for shares.

There are many different types of rights attached to shares that can differ based on the type of organization and type of shares. For example, some types of shares will provide the shareholder the ability to vote at the company shareholder's meeting, while other types of shares do not give the shareholder the same rights to vote like the type of shares that have a vote.

What Can Influence Share Prices?

There are a wide variety of factors that can have an impact upon the value of a company's stock, such as:

• Reports of Costs
• Reports of Developments
• Announcements
• Research
• News Related To Competition
• Macroeconomic Data
• Changes in Interest Rates
• Events in Other Markets

If shares of a publicly traded company are acquired through another party, e.g., a broker or affiliate firm, you may have ownership of the shares that were sold to you.

However, if a person acquires a product that has been priced to reflect the value of the underlying asset, then they will not have ownership of the underlying asset represented by the product.

For example, if you acquire an investment such as a contract for difference (CFD) that is representative of the common shares of a publicly traded entity, then you will not own the underlying common shares of that publicly traded entity.

Indices

What are Indices?

Indices are numerical representations of how each individual group of stocks (or other types of securities) changes in value over time. An index can be comprised of: Countries, Regions, Exchanges/Sectors, Companies, or Industries.

For example: An index would represent the changes with companies traded on Stock Exchanges and/or those in a given industry. The index will change accordingly when the price of each stock changes, as the indices are developed based on formulas rather than one (1) individual stock or physical item.

How Are Indices Constructed?

Index construction methods vary depending on what type of index it is or how it calculates its values (e.g., some use more weightings for larger companies than others). Also, when calculating an index's values, you must also take into consideration the following factors:

• Company share price movements
• Company announcements
• Industry sector activity
• Economic statistics releases
• Central bank interest rate FX announcements
• General global market trends

You can get exposure to an index through different products such as exchange traded funds (ETFs), futures trading or contracts for differences (CFDs). Each product offers its own structure and conditions.

Commodities

Commodities are raw materials and physical goods that are used in manufacturing, energy production, agriculture and other areas of the global economy.

Common commodity categories include:

• Metals: Gold, silver, copper and platinum
• Energy: Crude oil, natural gas and other energy products
• Agricultural products: Wheat, coffee, sugar and corn

Commodity markets can involve physical goods, futures contracts, funds and derivative products. The type of product determines how the commodity is accessed and what conditions apply.

What Can Influence Commodity Prices?

Commodity prices may be influenced by:

• Production levels
• Global demand
• Weather conditions
• Inventory reports
• Transport and supply-chain conditions
• Currency movements
• Geopolitical developments
• Government policy

For example, weather conditions can affect agricultural supply, while production decisions and transport conditions can influence energy markets.

Exchange-Traded Funds

An exchange-traded fund, commonly known as an ETF, is a fund whose units are listed and traded on an exchange.

An ETF can hold a range of instruments, depending on its stated objective. It may hold shares, bonds, commodities or a combination of different assets. Some ETFs are designed to track a market index, while others follow a specific sector, country, theme or asset category.

When a person holds ETF units, they hold an interest in the fund rather than directly holding every underlying instrument within that fund.

Key ETF Features

ETFs can differ in several ways, including:

• The markets or instruments they hold
• The index or objective they follow
• Their fund structure
• Their management approach
• Their fees and charges
• Their listing exchange
• The currency in which they are priced

The market price of an ETF can change during exchange trading hours. It may be influenced by the value of its underlying holdings, market activity and supply and demand for the ETF units.

Before considering an ETF, it is important to review its prospectus, factsheet, holdings, fees and relevant legal documentation.

Contracts for Difference

A Contract for Difference, commonly called a CFD, is a derivative product linked to the price movement of an underlying market.

The underlying market could be a currency pair, share, index, commodity or another financial instrument. A CFD does not provide ownership of the underlying asset.

For example, a share CFD may follow the price movement of a listed company’s share, but it does not give the holder ownership rights in that company.

Key CFD Features

CFDs can vary according to the provider, jurisdiction and product terms. Key features may include:

• An underlying market
• Buy and sell prices
• Margin requirements
• Leverage
• Spreads
• Commissions
• Financing charges where applicable
• Trading hours
• Corporate-action adjustments for certain instruments

CFDs are complex products and can involve a high level of risk. Margin and leverage can increase market exposure and can also increase the effect of price movements on an open position.

The availability of CFDs and the rules that apply to them can differ by jurisdiction. Product documentation, risk disclosures and legal terms should always be reviewed carefully.

Asset Classes and Product Structures at a Glance

Why the Differences Matter

Understanding the difference between an underlying market and a product structure can help readers interpret product information more clearly.

A share and a share CFD, for example, can both be linked to the same company. However, they have different ownership arrangements, charges, product terms and risk considerations.

Similarly, an ETF may provide exposure to several markets through one listed fund, while an index is simply a measure of how a selected group of components is moving.

These differences can affect:

Key Points to Review

Before using a financial product, review the following information carefully.