In part one of this series, we learned that the world of investing usually begins with a discussion centered around stocks and bonds, the two most common choices for the average investor’s portfolio. With stocks, your investment hinges on the success of the company, and its ability to generate cash flows to return to its shareholders. Very simply, if the company is successful, then you will be successful. With bonds, it’s a different story. When you buy a bond, you’re effectively loaning money to the institution who sold you the bond, and you only need the company to remain solvent to earn your interest and be repaid your principal. Both stocks and bonds can be purchased in mutual funds or as individual investments.
But, in addition to pure stocks or pure bonds, there exists a financial product called a derivative. These products, as evidenced by their name, derive their values from some underlying asset. Options or futures would be the best examples of derivative products.
As an investor who is interested in taking control of your own portfolio, you’ll need to make a choice between the different products or assets to invest in or trade. In this segment, we talk through what that decision looks like.
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