Securities — like stocks, exchange-traded funds, options, and futures — form the core of traders’ day-to-day lives. These assets represent investments. Subsequently, they allow companies, commercial enterprises, and municipalities to raise new capital.

Stocks

Although practically everyone recognizes the term “stocks,” public understanding remains low as to how they actually function. These securities denote ownership in a corporation. This ownership entitles the shareholder (the person who owns the stock) to a part of the corporation’s earnings and assets. Generally, stocks consist of two different types:

• Common – This kind of stock typically allows the owner to collect dividends and grants them voting power at shareholders’ meetings.

• Preferred – Most often, these stocks do not grant the owner voting rights. However, these shareholders will have a higher claim than those with common stocks. When it comes time to receive dividends, or if a company declares bankruptcy and becomes liquidated, shareholders with preferred stocks have priority.

Exchange-traded-funds (ETFs)

On the stock market, ETFs trade like stocks but more closely resemble mutual funds. They hold stocks, commodities, and other assets while remaining tradeable themselves. Because they reflect an index, their prices change throughout the day. In contrast, mutual funds have their net asset values (NAV) calculated at the end of the business day. ETFs, combine the flexibility of stocks with the diversification inherent in mutual funds. That, in addition to their tax efficiency and low costs, makes ETFs an appealing choice for many traders.

Options

These highly versatile securities represent sellable contracts. Those who sell options give buyers the license to buy or sell a particular asset at a previously agreed-upon “strike price” at a specific time. Option speculation highlights the buyers’ disparate views of the asset’s projected value.

• Call Option – This option allows the buyer to buy the asset at a certain price, meaning that they believe the option will go up in value, thus earning them a profit. In this instance, the seller typically believes that the value will go down.

• Put Option – Conversely, the put option allows the buyer to sell at a predetermined price, which means that they think the value will go up. The option seller in this case likely expects the value to go down.

Due to their high liquidity, options usually carry more leverage than stocks but require less capital, giving traders with less buying power more choices when diversifying their portfolios.

Futures

Futures, like options, consist of sellable contracts. However, unlike options, futures require the holder to fulfill the terms of the contract at the time of expiration. In practice, traders can still buy or sell futures in much the same way as options. Futures help to manage potential increases or decreases in the value of the contract’s underlying assets, allowing them to speculate or hedge their investments.