What are the different types of financial instruments, and how do they work?
1. Stocks: Stocks represent ownership in a company, and shareholders are entitled to a portion of the company’s earnings and assets. Stock prices fluctuate based on market demand and company performance.
2. Bonds: Bonds are debt securities issued by companies or governments. The bondholder loans money to the issuer and earns interest at a fixed rate. Bonds are generally considered a lower risk investment compared to stocks.
3. Mutual Funds: Mutual funds pool money from multiple investors and invest in a diverse portfolio of stocks, bonds, and other financial instruments. Investors receive returns based on the performance of the portfolio.
4. Exchange-traded funds (ETFs): ETFs are similar to mutual funds but are traded on stock exchanges like individual stocks. They are designed to track market indexes or a specific industry sector.
5. Options: Options contracts give the buyer the right, but not the obligation, to buy or sell an underlying security at a predetermined price and date. Options can be used for speculation or hedging.
6. Futures: Futures contracts are agreements to buy or sell an underlying asset at a specific price and date in the future. Futures are commonly used for commodities like oil, gold, and grains.
7. Commodities: Commodities are raw materials or resources, such as oil or gold, that can be traded on commodity exchanges. Prices of commodities are influenced by supply and demand factors and can be volatile.
8. Currencies: Forex trading involves buying and selling currencies with the aim of profiting from fluctuations in exchange rates. Currency trading is highly volatile and requires extensive knowledge and experience.