Key Takeaways

Bonds are

  • a way to raise capital through borrowing, used by corporations and governments;
  • an investment for the bondholder that creates return through regular, fixed or floating interest payments on the debt and the repayment of principal at maturity;
  • traded on bond exchanges through brokers.

Stocks are

  • a way to raise capital through selling ownership or equity;
  • an investment for shareholders that creates return through the distribution of corporate profits as dividends or through gains (losses) in corporate value;
  • traded on stock exchanges through member brokers.

Commodities are

  • natural or cultivated resources;
  • traded to hedge revenue or production needs or to speculate on resources' prices;
  • traded on commodities exchanges through brokers.

Derivatives are instruments based on the future, and therefore uncertain, price of another security, such as a share of stock, a government bond, a currency, or a commodity.


Mutual funds are portfolios of investments designed to achieve maximum diversification with minimal cost through economies of scale.

  • An index fund is a mutual fund designed to replicate the performance of an asset class or selection of investments listed on an index.
  • An exchange-traded fund is a mutual fund whose shares are traded on an exchange.
Institutional and individual investors differ in the use of different investment instruments and in using them to create appropriate portfolios.