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Investment - Introduction to Investment Instruments
When we invest, we must understand the risks we are incurring with our money as well as the level of return we need or expect. This understanding may help us individually in accomplishing our own financial goals, but it also has professional value. You might be working for a company that generates or distributes investment instruments, or that offers investment management or trading services that need an understanding of investment instruments.
The four primary categories of investment instruments are:
Equity securities (stocks)
Debt securities (bonds)
Alternative investments
Derivatives
These investment tools exist because they respond to the needs of users of capital as well as to investors’ needs. Users of capital include individuals, companies, and governments that need to raise capital for a number of reasons. Individuals, for instance, might need to borrow to finance a property purchase or their child’s schooling. Companies require cash to fund and grow their operations, and governments borrow when their tax receipts are insufficient to fulfill their expenditure commitments.
Each investment instrument has different characteristics that affect the risks to investors and the rewards they can expect to obtain. Debt securities represent loans made by investors to issuing firms and/or governments in order to receive interest revenue. Equity securities are issued by corporations and generally signify ownership in the issuing company; investors buy equity securities in exchange for sharing in the company’s future profits. Equity and debt securities are the building blocks of many investors’ portfolios; investing in stocks and bonds, either directly or indirectly, is how most investors participate in the financial markets.
Alternative investments are roughly described as investments outside typical publicly traded equities and debt securities, such as real estate, commodities, private equity, and hedge funds. Alternative investments can help investors boost profits and decrease risk in a portfolio of investments. Derivatives, which are contracts that draw their value from the performance of an underlying asset, exist to help both investors and borrowers manage future risks, such as fluctuations in stock or commodity prices, interest rates, exchange rates, or non-financial events, such as weather.
When we invest, we must understand the risks we are incurring with our money as well as the level of return we need or expect. This understanding may help us individually in accomplishing our own financial goals, but it also has professional value. You might be working for a company that generates or distributes investment instruments, or that offers investment management or trading services that need an understanding of investment instruments.
The four primary categories of investment instruments are:
Equity securities (stocks)
Debt securities (bonds)
Alternative investments
Derivatives
These investment tools exist because they respond to the needs of users of capital as well as to investors’ needs. Users of capital include individuals, companies, and governments that need to raise capital for a number of reasons. Individuals, for instance, might need to borrow to finance a property purchase or their child’s schooling. Companies require cash to fund and grow their operations, and governments borrow when their tax receipts are insufficient to fulfill their expenditure commitments.
Each investment instrument has different characteristics that affect the risks to investors and the rewards they can expect to obtain. Debt securities represent loans made by investors to issuing firms and/or governments in order to receive interest revenue. Equity securities are issued by corporations and generally signify ownership in the issuing company; investors buy equity securities in exchange for sharing in the company’s future profits. Equity and debt securities are the building blocks of many investors’ portfolios; investing in stocks and bonds, either directly or indirectly, is how most investors participate in the financial markets.
Alternative investments are roughly described as investments outside typical publicly traded equities and debt securities, such as real estate, commodities, private equity, and hedge funds. Alternative investments can help investors boost profits and decrease risk in a portfolio of investments. Derivatives, which are contracts that draw their value from the performance of an underlying asset, exist to help both investors and borrowers manage future risks, such as fluctuations in stock or commodity prices, interest rates, exchange rates, or non-financial events, such as weather.
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