Many money managers use derivatives for a variety of purposes, such as hedging — by taking a position in a derivative, losses on portfolio holdings may be minimized or offset by profits on the derivative. Likewise, derivatives can be used to gain quicker and more efficient access to markets; for example, it may be easier and quicker to purchase an S & P 500 futures contract than to invest in the underlying securities. Derivatives are a contract between two parties that specify conditions (especially the dates, resulting values and definitions of the underlying variables, the parties' contractual obligations, and the notional amount) under which payments are to be made between the parties. The most common underlying assets include commodities, stocks, bonds, interest rates and currencies, but they can also be other derivatives, which adds another layer of complexity to proper valuation. Still, even these scaled down figures represent huge amounts of money.
StockFor "capital stock" in the sense of the fixed input of a production function, see Physical capital. For the goods and materials that a business holds, see Inventory. Shares Shares represent a fraction of ownership in a business. A business may declare different types (classes) of shares, each having distinctive ownership rules, privileges, or share values. Types of stock Preferred stock may be hybrid by having the qualities of bonds of fixed returns and common stock voting rights. Rule 144 stock "Rule 144 Stock" is a common name given to shares of stock subject SEC Rule 144: Selling Restricted and Control Securities. Under Rule 144, restricted and controlled securities are acquired in unregistered form. Stock derivatives History One of the earliest stock by VOC During the Roman Republic, the state contracted (leased) out many of its services to private companies. Shareholder Main article: Shareholder Application Shareholder rights Trading
DebtA debt is an obligation owed by one party (the debtor) to a second party, the creditor; usually this refers to assets granted by the creditor to the debtor, but the term can also be used metaphorically to cover moral obligations and other interactions not based on economic value. A debt is created when a creditor agrees to lend a sum of assets to a debtor. In finance, debt is a means of using anticipated income and future purchasing power in the present before it has actually been earned. Terms Interest Interest is the fee charged by the creditor to the debtor. Interest rates may be fixed or floating. Repayment Collateral and recourse A debt obligation is considered secured if creditors have recourse to specific collateral. Issuers of debt Governments Governments issue debt to pay for ongoing expenses as well as major capital projects. The overall level of indebtedness by a government is typically shown as a ratio of debt / GDP.
Futures contractWhile the futures contract specifies a trade taking place in the future, the purpose of the futures exchange institution is to act as intermediary and minimize the risk of default by either party. Thus the exchange requires both parties to put up an initial amount of cash (performance bond), the margin. Additionally, since the futures price will generally change daily, the difference in the prior agreed-upon price and the daily futures price is settled daily also (variation margin). The exchange will draw money out of one party's margin account and put it into the other's so that each party has the appropriate daily loss or profit. If the margin account goes below a certain value, then a margin call is made and the account owner must replenish the margin account. This process is known as marking to market. A closely related contract is a forward contract. Origin Margin Initial margin is the equity required to initiate a futures position. Pricing Arbitrage arguments
Security (finance)A security is a tradable asset of any kind. Securities are broadly categorized into: The company or other entity issuing the security is called the issuer. A country's regulatory structure determines what qualifies as a security. Securities may be classified according to many categories or classification systems: Securities are the traditional way that commercial enterprises raise new capital. Investors in securities may be retail, i.e. members of the public investing other than by way of business. Corporate bonds represent the debt of commercial or industrial entities. Euro debt securities are securities issued internationally outside their domestic market in a denomination different from that of the issuer's domicile. Government bonds are medium or long term debt securities issued by sovereign governments or their agencies. Hybrid securities combine some of the characteristics of both debt and equity securities. Public securities markets are either primary or secondary markets.
Swap (finance)Swaps were first introduced to the public in 1981 when IBM and the World Bank entered into a swap agreement. Today, swaps are among the most heavily traded financial contracts in the world: the total amount of interest rates and currency swaps outstanding is more thаn $348 trillion in 2010, according to Bank for International Settlements (BIS). The Bank for International Settlements (BIS) publishes statistics on the notional amounts outstanding in the OTC derivatives market. At the end of 2006, this was USD 415.2 trillion, more than 8.5 times the 2006 gross world product. Source: "The Global OTC Derivatives Market at end-December 2004", BIS, , "OTC Derivatives Market Activity in the Second Half of 2006", BIS,  Usually, at least one of the legs has a rate that is variable. The five generic types of swaps, in order of their quantitative importance, are: interest rate swaps, currency swaps, credit swaps, commodity swaps and equity swaps. , where
Forward contractIn finance, a forward contract or simply a forward is a non-standardized contract between two parties to buy or to sell an asset at a specified future time at a price agreed upon today. This is in contrast to a spot contract, which is an agreement to buy or sell an asset today. The party agreeing to buy the underlying asset in the future assumes a long position, and the party agreeing to sell the asset in the future assumes a short position. The price agreed upon is called the delivery price, which is equal to the forward price at the time the contract is entered into. The price of the underlying instrument, in whatever form, is paid before control of the instrument changes. Payoffs The value of a forward position at maturity depends on the relationship between the delivery price ( ) and the underlying price ( ) at that time. For a long position this payoff is: For a short position, it is: How a forward contract works Suppose that Bob wants to buy a house a year from now. where
Financial market (Wikipedia)In economics, typically, the term market means the aggregate of possible buyers and sellers of a certain good or service and the transactions between them. The term "market" is sometimes used for what are more strictly exchanges, organizations that facilitate the trade in financial securities, e.g., a stock exchange or commodity exchange. This may be a physical location (like the NYSE, BSE, NSE) or an electronic system (like NASDAQ). Trading of currencies and bonds is largely on a bilateral basis, although some bonds trade on a stock exchange, and people are building electronic systems for these as well, similar to stock exchanges. Types of financial markets Within the financial sector, the term "financial markets" is often used to refer just to the markets that are used to raise finance: for long term finance, the Capital markets; for short term finance, the Money markets. The capital markets may also be divided into primary markets and secondary markets. Raising capital T.E.