Trading in market is often misunderstood as only stock trading. However there are many financial instruments in the financial market to trade. Here is a classified explanation of such instruments.
A security is a financial instrument or paper traded for value. Securities are classified into 2 types:-
A bond gives ‘loanership’ position to the customer. Bonds is an example of debt financing to fund companies or governments for new projects or ventures. Bond holders have no control over the entity to which they have lent money.
The issuer (company or government) pays the lender (who invests in a bond) interest and pays back the initial capital by the bond’s maturity date.
A stock gives ‘ownership’ to the buyer in a security which gives a claim to a share of company’s earnings and assets.
Derivatives are contracts whose value is based on something else or in proper terms a security whose value is determined by the under-lying asset. Derivatives have 2 main uses:
- To hedge risk.
- Speculation for profit.
They mainly are of 4 types:-
- Forwards: A contract between two parties to buy or sell an asset at a specified future date. They are not traded.
- Futures: Fundamentally similar to forwards but are standardised and regulated. Often used to speculate on commodities.
- Options: A contract that gives the right but not the obligation to buy (call) or sell (put) a security or other financial asset.
- Swaps: The exchange of one security for other.
There you have it, the basic classification of the financial instruments to trade. A more detailed explanation on each of them will be posted later.
Do post your questions, comments, or suggestions. Your questions will be answered and the suggestions will be taken seriously. Your feedback is important.