|Based on the underlying||Financial assets: Means by which individuals hold claim on real assets and future income generated by these assets, e.g., securities like stocks and bonds.||Real assets: Include physical assets like real estate, equipment, commodities, and other assets.|
|Based on the nature of claim by financial securities||Debt securities: Periodic interest payments made on borrowed funds that might be collateralized.||Equity securities: Represent ownership positions and claim on the future cash flows of the business.|
|Based on where the securities are traded||Publicly traded: These securities trade in public markets through exchanges or dealers and are subject to regulatory oversight.||Privately traded: These securities are not traded in public markets. They are often not subject to regulation.|
|Based on delivery||Spot market: Markets for immediate delivery of assets.||Forward market: Contracts that call for future delivery of assets and include forwards, futures, and options.|
|Based on the underlying of the derivative contract||Financial derivative contract: These contracts draw their value from financial assets like equities, equity indexes, debt, and other assets.||Physical derivative contract: These contracts draw their value from real assets like commodities.|
|Based on issuance of security||Primary market: Issuers sell securities directly to investors.||Secondary market: Investors buy and sell securities among themselves.|
|Based on maturity||Money market: Securities with maturities of one year or less.||Capital market: Securities that have more than one year maturity or equities that do not have any maturity.|
|Based on the type of investment markets||Traditional investment markets: Includes all publicly traded debt and equities.||Alternative investment markets: Includes hedge funds, private equity, commodities, real estate, and precious gems that are hard to trade and value.|
Securities can be broadly classified into: fixed income, equities and shares in pooled investment vehicles.
Refers to debt securities where the borrower is obligated to pay interest and principal at a pre-determined schedule. They might be collateralized, i.e., investors have claim of certain physical assets in case of a default.
The different types are:
Refers to ownership claims by investors in companies.
The different types are:
Pooled investments include mutual funds, trusts, exchange traded funds (ETFs), and hedge funds. They issue securities to represent the shared ownership in the assets. Money from several investors is pooled together to be managed by a professional money manager according to a specific investment strategy. The advantage of investing in pooled vehicles is to benefit from the investment management services of managers and from diversification opportunities. Pooled vehicles may be open-ended or close-ended.
Currencies are monies issued by national monetary authorities. Reserve currencies such as dollar and euro are currencies that national central banks around the world hold in large quantities. Currencies trade in foreign exchange markets, spot markets, forward markets, or futures markets.
Commodities include precious metals, energy products, industrial metals, agricultural products, and carbon credits. They trade in spot, forward, and futures markets. They are traded in spot markets for immediate delivery and in forwards and futures markets for future delivery.
Real assets are tangible assets such as real estate, machinery, and airplanes which are normally held by operating companies. Real assets are unique, illiquid, and costly to manage. They are attractive to investors for two reasons:
Real estate investment trusts (REITs) and master limited partnerships (MLPs) securitize real assets and facilitate indirect investment in real assets. Since these securities are more homogeneous and divisible than the real assets they represent, they are often more liquid and more suitable as investments.
A contract is an agreement between traders to perform some action in the future that can either be settled physically or in cash.
Based on the underlying asset, contracts can be further classified into:
Contracts for Difference (CFD) allow people to speculate on the price of an underlying asset. The buyer benefits if the price of the underlying asset increases. These are derivative contracts because their value is derived from the underlying asset. They are generally settled in cash.
The major types of contracts (also termed as derivatives) are:
A forward contract
is an agreement to trade the underlying asset at a future date at a pre-specified price. It is not standardized and is not traded on exchanges or in dealer markets.
A futures contract
is a standardized forward contract for which amount, asset characteristics and delivery date are the same. Standardization ensures higher liquidity.
A swap contract
is an agreement to swap payments of one asset for the other. The different types are:
Contracts that give the holder a right, but not the obligation, to buy/sell an underlying security at a specified price at or before a specific date. The different types are:
Credit default swaps:
Contracts that offer insurance to bondholders. They make payments to a bondholder if a borrower defaults on its bonds.