Investor's choice on financial markets
There are a wide variety of markets in which one can invest money. The main markets are stocks (equity), bonds, forex, derivatives and physical assets. Furthermore, within each of these types of markets, there can be even more specialty markets.
The market that is most familiar to the average investor is the stock market. This market allows investors to buy and sell shares of ownership in publicly traded companies.
Money is made in this market in two main ways:
The first is through capital gains, in which the value of each share increases in value.The second is through dividends, in which companies pass on income to investors.
(For more detail, check out the Stock Basics tutorial.)
The debt market is used by governments, companies and financial intermediaries to issue debt instruments to raise capital. The debt issuers then make regular payments to debt holders in the form of coupon payments and, once the debt matures, pay back the principal on the debt.
The most common type of financial instruments issued in this market are:
bonds billsnotes certificates of deposit
There are also more exotic types of debt including mortgage-backed securities and collateralized debt obligations.
Foreign Exchange (Forex)
The forex market allows investors to speculate on changes in the exchange ratesbetween currencies. Investors will purchase one currency by selling another in the hope that the currency they purchased goes up in value compared to the one they sold.
In this market, because the moves between currencies are generally small and investments are shorter term, a lot of leverage is used. Some forex brokers allow leverage as high as 500:1, which means that you can control $500 for every $1 you invest.
The investment in physical assets is essentially the purchase of assets such as metals, jewelry, real estate, cattle and much more.
In this market, investors hope that the price for which they can sell an asset is more than what they paid for it. The risks and costs associated with this type of investment will differ with each type of physical asset.
For example, there can be holding fees on gold; if you own cattle, the cost of caring for them is considerable.
The last major type of investment is an expansion of all of the above types of markets. Derivatives are securities that derive their value from an underlying asset such as a stock, interest rate, currency or physical asset.
Investors in these types of securities can go long or short on the underlying assetand can purchase either the right or obligation to purchase or sell it. As the value of the underlying asset changes, the value of the derivative changes as well.
The major types of derivatives are: