The Beginner's Guide to Financial Markets and Trading Instruments

Over the last decade or so, cryptocurrency trading has become a very popular pastime amongst many internet users. So much so, that during this time a vast number of online crypto trading platforms have been made available. Regardless, one of the most widely used trading platforms today is Binance, which is one of the first, and hence most reliable, crypto trading services.

If you are new to cryptocurrency trading and are wondering how to start trading on Binance, this article is for you. This guide will walk you through all the elements and features of the Binance trading interface, outlining in simple terms all you need to know about trading on Binance.

This article will therefore provide explanations of the following aspects of trading on Binance, outlining what they are, how they work, and what you can do with them.

• Financial Instruments

• Spot Markets

• Margin Trading

• Derivatives Markets

• Futures Contracts

• Options Contracts

By explaining these various important facets of trading on Binance, the article will serve as a beginner’s guide to understanding and, therefore using, the Binance trading interface. By the end of the article, you will have a much better understanding of the financial markets on Binance as well as various trading instruments available for use on the platform. So let’s get into it!

What is a Financial Instrument?

A financial instrument is, in the simplest of terms, a tradable asset. Everyday financial instruments include cash, gold or silver, a document confirming ownership, etc. No matter how complex a financial instrument may seem, one must understand that at its core, whatever the financial instrument represents can be regarded as a tradable asset.

Cryptocurrencies fall into the category of derivative instruments as they derive their value from something other than the crypto token itself. Moreover, although cryptocurrencies are often thought of as digital tradable assets, it is now well understood that their true potential lies in the possible emergence of an entirely new financial and economic system.

Due to this, cryptocurrencies are now thought to belong to a completely different category of digital tradable assets. Understanding this key position that cryptocurrencies hold in the world of finance today is crucial to understanding how the rather complex processes behind trading on Binance work.

What is the Spot Market?

If you have worked with Binance’s trading interface before, you may have come across the term spot trading. Spot trading can be better understood through the spot market, which is where financial instruments, like cryptocurrency, can be traded for immediate delivery. In the context of trading on Binance, delivery refers to the exchange of cryptocurrencies for cash.

In other words, a spot market is a place where trades and exchanges are made on the spot. Due to the fact that the trades are settled immediately, the asset goes at the current market price of the asset. This current market price is known as the ‘spot price’ of the asset.

Therefore, you can use this simple knowledge to perform spot trading on the Binance spot market. Not only can you use spot trading to exchange cryptocurrency for cash at the spot price, but you trade one cryptocurrency for another. So, for example, you can trade BNB for BUSD on Binance simply by going to the BNB/BUSD spot market. This is by far the easiest way to trade and exchange cryptocurrencies as the coins will be swapped instantly once the orders are filled.

What is Margin Trading?

There are also other ways of trading on Binance other than spot trading. One of these trading instruments is known as Margin trading, which is a way of trading that uses borrowed funds from a third party. While margin trading has many upsides to it, it is a bit more complicated than spot trading and hence requires a keen understanding of how it works, as well as some experience, to perform successfully.

A margin account, which is the third party from which the traders borrow funds, provides traders with access to capital, all while eliminating some counterparty risk. In other words, traders can exchange the same position size while keeping less capital on the crypto exchange itself.

Two terms that often come up when dealing with margin trading are margin and leverage. Margin is the name for the amount of cryptocurrency, or better, capital, which you commit from your own pocket. Meanwhile, leverage refers to the amount that you choose to amplify your margin with. For example, if you choose 2x leverage, this means that you will open up a position no more or less than double the amount of your committed capital, i.e. your margin.

The trading game of margin trading and leverages brings up a common concern that needs mentioning at this point. Notably, the higher the leverage you choose the closer your entry is to the liquidation price and, hence, the more you will run the risk of losing your entire margin by getting liquidated.

What is the Derivatives Market?

As mentioned earlier, derivatives are financial, tradable assets that derive their value from something else. A derivative could derive its value from an underlying asset or even a basket of assets. The most common types of assets that derivatives derive their value from are bonds, stocks, commodities, market indexes, and cryptocurrencies.

Moreover, the derivative product itself can be thought of as a contract between various parties. The underlying asset that is used as the benchmark for the value of the derivative is what gives the derivative its price. Some common examples of what are known as derivatives products are futures contracts, swaps, and options contracts.

As a consequence of the mechanism by which derivatives get their value and price, the derivatives market tends to be rather shaky at times. This is not only because derivatives can exist for virtually any financial product, but also because derivatives can exist for derivatives themselves. Moreover, more derivatives can be created from those derived derivatives, and so on.

What are Futures Contracts?

As mentioned, there are different types of derivatives products that can be availed on the Binance trading interface. One of these is known as a futures contract, which, in the simplest terms, allows traders to speculate on the future price of a given crypto asset. Accordingly, parties must agree to settle the transaction at a later date, known as the expiry date of the futures contract. The underlying assets for these contracts are usually cryptocurrencies, but they can also be stocks, bonds, and other commodities.

Importantly, the expiration date of a futures contract is the final date that trading activity for that specific contract can continue. At the end of the expiration date, the contract expires at the last traded price. However, the settlement of the futures contract is determined before this date. The contract can be settled either through cash or cryptocurrency or through the physical delivery of the underlying commodity.

What Are Options Contracts?

Another type of derivatives product available when trading on Binance is known as an Options contract. An options contract gives associated parties (traders) the right to buy or sell an asset in the future at a particular price. While traders are given the right to do so according to an options contract, they do not have the obligation.

Upon buying an options contract, various traders will speculate about the price going in one direction or another. Accordingly, there are two different types of options contracts: call options and pull options. The former bets on the price going up while the latter bets on the price going down.

Importantly, options contracts enable traders to partake in highly complex trading tactics and strategies, as well as various risk management methods like hedging. When it comes to cryptocurrency trades, options contracts are usually best availed by cryptocurrency miners, who might want to hedge their substantial crypto holdings. In doing so, miners can be better protected against any event that might have a detrimental impact on their cryptocurrency holdings and funds.

Summary

The Binance trading interface is one of the very first cryptocurrency exchanges to be made available to the public. While it is not as straightforward to use as other popular crypto exchanges, trading on Binance involves a number of different trading instruments that can be availed by crypto traders to make the most of their holdings on the exchange.

Moreover, Binance offers its users a whole host of information and statistics on exchange values, candle-stick charts, and market trends that can be used to assess various crypto markets, derivatives, currencies, and trends.

Using this data, along with the various tools and Binance trading instruments available on the platform, traders can partake in a large number of different types of trades to increase their chances of making the most of their crypto assets.

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