What are the different types of financial instruments?

Stocks are a common form of financial instrument.

Financial instruments are securities that investors large and small can use to gain exposure to financial markets. Some of these securities are common, such as stocks or equity investments, as well as bonds or debt securities. Small investors and institutional investors, including mutual funds, often buy and sell stocks and bonds. More complex financial instruments, including derivative contracts such as futures and options, are often used by professional money managers, including hedge funds.

Hedge funds are designed to generate returns that exceed those of the broader markets.

Stocks and bonds are the more traditional types of financial instruments, although there are sophisticated ways to invest in these bonds. When an investor buys shares, he or she is getting an equity stake in that corporate entity that gives him or her the right to share in the profits and vote on some important events. Buying stocks also exposes the investor to risk, as there is little recourse if a stock loses value.

Bonds are one type of debt and this category represents another type of financial instrument. Companies, local governments and federal governments can issue bonds as a means of raising money in the capital markets. Investors who buy bonds are lending money to the issuer in exchange for receiving ongoing interest payments, plus a final payment in the amount of the original investment’s principal when the bond matures. Bonds are often considered a safe haven to invest in because traditional bonds are relatively safe. There are riskier bonds known as high yield investments that pay a higher interest rate but have a higher risk of default compared to a more conservative debt instrument such as an investment grade bond.

See also  What are the food stamp qualifications? (with photos)

Futures and options are among the most sophisticated and potentially risky financial instruments and are often used by professional money managers. A futures contract is an agreement to buy or sell, also known as a trade, some underlying commodity such as gold, crude oil or agricultural items at a future date and at a predefined price. Options are contracts that give traders the option to buy other financial instruments, including stocks, at a predetermined price within a certain time frame.

Alone, derivatives are worthless. The value of these financial instruments is determined by the underlying security or asset, such as stocks or natural resources. Hedge funds, which are lightly regulated investment funds managed by professionals and designed to generate returns that exceed the broader markets, often use derivatives trading to speculate on an anticipated price movement or to hedge, or hedge, another position. trading.

Leave a Comment