Overview of Investments and Markets

In this section, you will learn about the different financial instruments and the difference between bonds and stocks. Bonds are debt instruments, while stocks are equity instruments. This section also discusses other financial instruments, like derivatives, commodities, and mutual funds.

Learning Objectives

  1. Identify the features and uses of issuing, owning, and trading bonds.
  2. Identify the uses of issuing, owning, and trading stocks.
  3. Identify the features and uses of issuing, owning, and trading commodities and derivatives.
  4. Identify the features and uses of issuing, owning, and trading mutual funds, including exchange-traded funds and index funds.
  5. Describe the reasons for different instruments in different markets.

Before looking at investment planning and strategy, it is important to take a closer look at the galaxy of investments and markets where investing takes place. Understanding how markets work, how different investments work, and how different investors can use investments is critical to understanding how to begin to plan your investment goals and strategies.

You have looked at using the money markets to save surplus cash for the short term. Investing is primarily about using the capital markets to invest surplus cash for the longer term. As in the money markets, when you invest in the capital markets, you are selling liquidity.

The capital markets developed as a way for buyers to buy liquidity. In Western Europe, where many of our ideas of modern finance began, those early buyers were usually monarchs or members of the nobility, raising capital to finance armies and navies to conquer or defend territories or resources. Many devices and markets were used to raise capital but the two primary methods that have evolved into modern times are the bond and stock markets.

In the United States, 47 percent of the adult population owns stocks or bonds, most through retirement accounts.

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