Most people think of stocks when it comes to the investment world when, in reality, the investment universe is vast. It features a wide array of trading securities, including not only stocks, but bonds, options, currencies, commodities, and other less-liquid vehicles like real estate. These securities trade continuously around the world, creating an interdependent market that functions to provide capital to global economies.
Central banks and other financial organizations work to ensure efficient markets where buyers and sellers come together to trade assets. U.S. markets, for example, are operated by exchanges such as the New York Stock Exchange and Chicago Board Options Exchange, and regulated by the likes of the Securities and Exchange Commission and the Commodity Futures Trading Commission. Trading securities are tracked by major indexes including the Dow Jones Industrial Average, Nikkei 225, and FTSE 100.
Stocks are most common type of equity found in investor’s portfolios. Stock can be in the form of common or preferred, and many pay quarterly or annual dividends. Common stock represents ownership and a claim on a company’s earnings. In the case of bankruptcy, common shareholders have a lower claim on a company’s assets in the case of bankruptcy than that of preferred shareholders. A dividend represents a cash or stock payout of a company’s earnings to its shareholders. Stocks as an ownership class are often referred to as the equity market and are generally seen as a riskier asset compared with the large government debt market.
A company’s stock is issued in the primary market through an IPO or as a seasoned issue. After being placed in the primary market, usually with help of an underwriter, shares are then available to be traded in the secondary market. When an investor places an order to buy or sell stock with their brokerage house, they transaction takes place in this secondary market. Investors value stocks using various trading techniques such as fundamental and technical analysis.
Bonds are the other primary trading security associated with the market. Bonds are debt instruments offered by various entities such as a government, municipality, or corporation. This asset class is referred to as the fixed-income market. Short-term debt instruments like U.S. Treasury bills and municipal notes are often used in money market accounts because of their strong liquidity and short maturities. Bond investing is often used as a safe-haven trading technique during difficult economic times as investors shift away from riskier assets like stocks into fixed-income securities.
While most stock and bond markets are mostly perceived in the context of domestic markets, the foreign exchange market, or Forex, is the global interchange for trading world currencies. The most popularly traded world currencies are the dollar, yen, euro, pound, franc, and peso.
Options are derivative instruments that base their value upon the price of other assets like stocks, bonds, and commodities. Options grant holders the right, but not the obligation, to buy or sell an underlying asset, at the cost of a premium. Options have historically been unfairly perceived as having higher risk because of their leveraging effect and public uncertainty, but many traders use derivatives to hedge themselves against risk. Options are a fast-growing security class.
Financial advisors often recommend stocks for an investor’s portfolio compared with other trading securities because they are the traditional form of ownership. Yet individual investors should be cognizant of the diverse mix of trading securities in the market. The wealth of asset classes available to traders can help reduce their risks by portfolio diversification while enabling new trading techniques.