A Guide to Financial Instruments

The investment world is a much more confusing place for beginner investors than it was a few decades ago. The variety of financial instruments has increased as has the number and diversity of investors themselves. Starting out, the best thing to do is to become familiar with the different types of investment vehicles in which you can place your money.

All investments involve a certain amount of risk. In a savings account, the risk is minimal because the bank guarantees an interest rate and the federal government guarantees the funds up to $250,000. However, due to the nature of investment, this minimal risk is responsible for the low rates of interest available at most banks.

If you want your savings to earn more, you can invest them in one or more of a variety of financial instruments available on a stock exchange.

Stocks. Stocks are shares in a company and when you purchase some, you become part owner of that company. However, for this ownership to be significant, you might need to buy hundreds of thousands or even millions of shares just to register ownership of a minimal percentage of the business. As a part owner, you may also receive regular portions of the business profits. These are known as dividends.

Bonds. Buying a bond means buying government debt. You are essentially loaning money to the government in exchange for its promise to pay back the money plus a small amount of interest, known as the yield, at a given date.

Commodities. A commodity is a good that is in demand. It is different than a stock because a commodity purchase involves a real quantity of consumable goods. For example, iron and wheat are two commodities traded at high volume on the modern market. Precious metals are types of commodities that are very popular right now as well.

Futures Contracts. These are somewhat advanced types of financial instruments. Some investors buy these contracts for delivery of certain commodities. They buy them at a price that they think will be lower than their actual value at the time of delivery in order to make a profit.

There are many other types of investment, such as options, which can wait until you gain some experience in trading. Each of the above instruments carries a much higher risk level than a savings account. However, they can also gain value at a much faster rate.