Types of Financial Instruments in American Market

23 September 2024

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Types of Financial Instruments in American Market

The financial instruments traded in the American market are very diverse, providing investors with a wide range of options to achieve their financial goals. Each financial instrument has its own characteristics, risk level, and associated return.

Types of Financial Instruments in American Market

Here is an overview of the most important Types of Financial Instruments in American Market:

1. Stocks

· Representation of ownership: When you buy a share in a company, you become the owner of a small part of that company.

· Return: The return from stocks comes through the dividends paid by the company, and the increase in the value of the stock over time (capital gains).

· Risks: Stocks are considered high-risk investments, as their value is affected by many factors such as the company's performance, economic conditions, and competition.

2. Bonds

· Debt instrument: When you buy a bond, you lend an amount of money to a government or company, and you receive periodic interest until the maturity date.

· Return: The return from bonds comes from the fixed interest paid by the issuer of the bond.

· Risk: Bonds are less risky than stocks, but they carry risks such as default risk and interest rate volatility.

3. Exchange-traded funds (ETFs)

· A basket of assets: ETFs collect a basket of assets such as stocks and bonds, and trade on the stock exchange like a single stock.

· Diversification: ETFs provide diversification to an investment portfolio, which helps reduce risk.

· Risk: The risks of ETFs depend on the assets they are made up of.

4. Mutual funds

· A basket of assets: Similar to ETFs, but not traded on the stock exchange.

· Professional management: These funds are managed by professional managers.

· Risk: The risks depend on the investment policy of the fund.

5. Futures

· A forward agreement: A futures contract gives the right and obligation to buy or sell a specific asset at a specified price on a specified future date.

· Margin trading: Futures are traded on margin, which magnifies profits and losses.

· Risks: Futures are high-risk instruments and require a high level of trading experience.

6. Options

· A right, not an obligation: The option gives the buyer the right, but not the obligation, to buy or sell a specific asset at a specific price within a specific period of time.

· Marginal trading: Options are traded using margin.

· Risks: Options are high-risk instruments and are mainly used for short-term trading.

7. Cryptocurrencies

· Digital assets: These are encrypted digital currencies that use encryption to protect transactions.

· Volatility: Cryptocurrencies are characterized by high price volatility.

· Risks: Cryptocurrencies are high-risk investments and are subject to weak regulation in many countries.

Factors to consider when choosing financial instruments

· Investment objectives: Determine your short- and long-term investment objectives.

· Risk tolerance: Determine your ability to tolerate financial risks.

· Investment time horizon: Determine the period for which you wish to invest.

· Costs: Compare different investment costs.

· Investing carries risks: No investment is guaranteed to be profitable, and you may lose part or all of your investment amount.

· Diversification: Diversification in investments is one of the most important ways to reduce risk. Long-term investment: Long-term investments usually yield better returns than short-term investments.

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