Common and Preferred Stocks
- Common Stocks: This is the most common type of shares that investors buy. Owners of common stock may get voting rights in the company, allowing them to participate in corporate decisions. They also may receive dividends, but this is not guaranteed and depends on the company’s profits and dividend policy. Common stockholders are last in line to receive any remaining assets if the company goes bankrupt.
- Preferred Stocks: Preferred stockholders have a higher claim on dividends and assets. This means they get paid dividends before common stockholders, and if the company goes bankrupt, they’re more likely to receive a portion of the assets. However, preferred stockholders usually don’t get voting rights in the company.
Bonds and Other Fixed-Income Securities
Bonds are a type of fixed-income instrument. Companies or governments issue bonds to raise money. When you buy a bond, you are essentially lending money to the issuer in exchange for periodic interest payments and the return of the bond’s face value when it matures.
Bonds are generally considered less risky than stocks. If a company goes bankrupt, bondholders are paid before stockholders. However, the trade-off is that bonds usually offer lower potential returns than stocks.
Exchange-Traded Funds (ETFs) and Mutual Funds
- Exchange-Traded Funds (ETFs): These are funds that track an index, sector, commodity, or other assets, but can be bought and sold like a common stock on a stock exchange. ETFs offer an easy way to diversify your portfolio without having to buy each individual stock or bond.
- Mutual Funds: These are investment vehicles managed by professionals. When you invest in a mutual fund, your money is pooled together with other investors’ money to buy a diversified portfolio of stocks, bonds, or other assets. Mutual funds are not traded on an exchange and their price is calculated once at the end of the trading day.
Options, Futures, and Other Derivatives
- Options: These are contracts that give the buyer the right, but not the obligation, to buy or sell an underlying asset (like a stock) at a specified price within a certain period of time. Options can be used for various purposes, including hedging risk, generating income, or speculating on price movements.
- Futures: A futures contract is a legal agreement to buy or sell a particular commodity or asset at a predetermined price at a specified time in the future. Futures are used to hedge the price movement of the underlying asset to help prevent losses from unfavorable price changes.
- Other Derivatives: These are financial instruments like swaps, forwards, or contracts for difference (CFDs), whose values are derived from underlying assets like stocks, bonds, commodities, currencies, interest rates, or market indices.
Each type of security serves different investment needs and will be suitable for different types of investors depending on their risk tolerance, investment horizon, and investment goals. As we delve deeper into the subsequent sections, we’ll explore some of these securities, particularly stocks and options, in more detail.