A stock is an equity security that represents ownership in a corporation. Each share of stock represents a claim on the corporation’s earnings and assets. Corporations may issue both commonstock and preferred stock. Stockholders accept the risks inherent in owning a company.
A bond represents the indebtedness of their issuer. A bond is any interest-bearing or discounted government or corporate security that obligates the issuer to pay the bondholder a specified sum for the use of the money, usually at specific intervals, and to repay the principal amount of the loan at maturity.
A mutual fund is operated by an investment company that raises a pool of money from shareholders and invests it into stocks, bonds, options, futures, currencies or money market securities. All shareholders share equally in the gains and losses generated by the fund. A mutual fund’s investment objectives, risks, charges and expenses are stated in the prospectus.
A derivative instrument is a contract whose value is derived from the performance of an underlying financial asset, index or other investments. When used properly, they can create many benefits, including the reduction of risk. Options are the most common derivatives.
An annuity is a form of contract sold by life insurance companies that guarantees a fixed or variable payment to the owner of the annuity, the annuitant, at some future time, usually at retirement. All capital in an annuity grows tax-deferred.
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A derivative instrument is a contract whose value is derived from the performance of an underlying financial asset, index or other investments. Derivatives involve substantial risk and may not be suitable for all investment strategies. The most common derivatives are Options contracts. These are agreements that give the right to buy or sell property in exchange for an agreed upon sum. An ordinary option is a derivative because its value changes in relation to the performance of an underlying stock.
It's very important to understand the risks of trading options. Read Characteristics and Risks of Standardized Options carefully to understand the risks.
Copies are available from Options Clearing Corporation (OCC), which issues and guarantees all listed option contracts. You can download the booklet at OCC's website, www.optionsclearing.com. You can request a copy by writing the organization (One North Wacker Drive, Suite 500, Chicago, IL 60606) or by calling 888-678-4667 (888-OPTIONS). OCC's booklet is intended only for educational purposes. No statement in it should be construed to be a recommendation to buy or sell a security or as investment advice.