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Financial Instruments Guide

A comprehensive guide to understanding various financial instruments, including stocks, bonds, options, futures, and more.

Understanding Your Options: A Primer on Derivatives​

Financial derivatives are contracts between two parties that derive their value from an underlying asset or index. They can be used to hedge against potential losses or gains in the market, as well as to speculate on price movements. Common types of derivatives include options, futures, and forwards.

Stocks​

Stocks, also known as equities, represent ownership in a company. When you buy a stock, you're essentially buying a small piece of that company. Stocks can be traded on various exchanges, such as the New York Stock Exchange (NYSE) or NASDAQ.

Characteristics of Stocks:​

  • Represent ownership in a company
  • Can be traded on various exchanges
  • May pay dividends to shareholders

Bonds​

Bonds are debt securities issued by companies or governments to raise capital. When you buy a bond, you're essentially lending money to the issuer, who promises to pay you back with interest. Bonds can be classified into different types, such as government bonds, corporate bonds, and municipal bonds.

Characteristics of Bonds:​

  • Represent debt obligations
  • Can be traded on various markets
  • Typically offer regular income through interest payments

Options​

Options are contracts that give the buyer the right, but not the obligation, to buy or sell an underlying asset at a specified price. There are two main types of options: calls and puts.

Characteristics of Options:​

  • Give the buyer the right, but not the obligation, to buy or sell
  • Can be used for hedging or speculation
  • Have an expiration date

Futures​

Futures contracts are agreements to buy or sell a specific asset at a specified price on a designated date. They're often traded on exchanges and can be used for hedging or speculation.

Characteristics of Futures:​

  • Represent agreements to buy or sell assets at specified prices
  • Can be used for hedging or speculation
  • Have settlement dates

Forwards​

Forwards are customized contracts between two parties that agree to buy or sell a specific asset at a specified price on a designated date. They're often traded over-the-counter (OTC) and can be used for hedging or speculation.

Characteristics of Forwards:​

  • Represent customized agreements to buy or sell assets
  • Can be used for hedging or speculation
  • Have settlement dates

Commodities​

Commodities are physical goods that are bought and sold on various markets. They can include precious metals, energies, agricultural products, and more.

Characteristics of Commodities:​

  • Are physical goods traded on various markets
  • Can include precious metals, energies, agricultural products, and more
  • May be used for hedging or speculation

Currencies​

Currencies represent the official money of a country. They can be bought and sold on various foreign exchange (Forex) markets.

Characteristics of Currencies:​

  • Represent official monies of countries
  • Can be bought and sold on Forex markets
  • May fluctuate in value based on economic indicators