It can be hard to quantify the full size of the world’s financial markets, some context can be provided by the fact that the global stock market is worth an estimated $95 trillion.
While the stock market often represents a viable starting point for new investors, however, it’s crucial that any aspiring trader looks to diversify their portfolio over time. Diversification refers to a technique that reduces risk and exposure by allocating capital across a broad range of investments, with a view to maximising returns over time.
But how can you look to diversify your portfolio in practical terms, and what are the key asset classes to consider?
Stocks, Shares and Indexes
Let’s start with the single most popular asset class; as the stock market offers access to global shares and equities that are quite diverse in nature.
For example, small, mid and large-cap stocks exist in the market, with each type categorised according to their total market capitalisation value and their potential for future growth.
Similarly, you can also trade indices within this marketplace, including iconic global options such as the S&P 500 and the Nasdaq 100. These indexes include some of the largest tech stocks in the world, and provide instant diversification by offering you access to multiple equities that help to minimise your exposure.
With indexes like the DAX30, you can also target a broad range of the biggest stocks in Germany, with the UK’s FTSE 100 offering a similar option to investors.
The forex market is one of the largest entities of its type in the world, with an estimated $6.6 trillion now traded globally on a daily basis.
While the forex market isn’t quite as volatile as stocks, its price fluctuations do offer particular value for short-term traders, especially as you can trade currencies as derivatives and speculate on movements rather than assuming ownership of the underlying instrument.
Because of this, forex trades can often deliver frequent and more flexible returns for investors, providing a more constant stream of income in comparison with long-term stock holdings.
Bond and Commodities
Bonds are fixed income products that can be commissioned by both institutions and governmental bodies, and are considered to be one of the most risk-averse investment vehicles in the marketplace.
In fact, bonds may compromise as much as 40% of any youngster’s managed portfolio, and with this number potential increasing to 60% as older investors start to focus on consolidating and pursuing incremental returns over time.
Another key diversification tool is commodities trading, through which traders often speculate on the price movement of a diverse range of commodities such as coal, iron ore and agricultural produce.
Once again, this underrated marketplace offers natural diversification due to the sheer range of commodities that can be traded, so it may be something that you want to branch into over time.