What you can buy: an overview of financial instruments

"The Fed is the greatest hedge fund in history — financed on one side by currency in circulation, which costs nothing."

The Fed is the greatest hedge fund in history — financed on one side by currency in circulation, which costs nothing.

Nezuyo focuses on analyzing individual company stocks, but stocks are just one of the instruments you can invest in: knowing the others helps explain why stocks have a different risk-and-return profile than the rest.

A stock represents a share of ownership in a company: whoever holds it shares in both its profits and its losses, with no guarantee of getting the invested capital back. A bond, on the other hand, is a loan: whoever buys it lends money to a company or a government in exchange for a fixed interest rate and repayment of the principal at maturity, usually with lower risk but also more limited upside.

An ETF (exchange-traded fund) is a basket of many securities - stocks, bonds, or other assets - that can be bought with a single order as if it were one security: it tracks an index or a sector instead of betting on a single company, which reduces the specific risk of one bad pick but also gives up the chance to beat the market by picking the best companies.

Commodities (gold, oil, wheat) and cash round out the picture: commodities don't generate any cash flows of their own, their price depends purely on supply and demand; cash earns almost nothing but is the only instrument that doesn't lose nominal value in the short run. Each instrument responds differently to the same economic conditions, which is why they get combined into a portfolio - a topic the course comes back to later, in a module of its own.