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Classification of financial assets and markets

Financial assets (investments) are commonly categorized into securities, currencies, contracts, commodities, and real assets.


Securities include equity securities, fixed-income securities, and pooled investments.

Equity securities

Equity securities represent an ownership interest in a company. These are either public (when listed on an exchange) or private (when not listed, such as private equity, venture capital). Major categories include common stock, preferred stock and warrants.

  • Common stock: residual (left-over) interest in a company
  • Preferred stock: preferred stake in assets and dividends
  • Cumulative preferred stock: dividends accumulate when not paid
  • Noncumulative preferred stock: dividends not paid do not accumulate
  • Warrants: represents an option to buy equity

Fixed-income securities

Fixed income (also called debt investments) pay periodic interest and principal, which is either fixed, floating or indexed. These include:

  • Bills (issued in money markets, typically issued by governments)
  • Notes (issued in capital markets, less than 10 years maturity, issued by corporations and governments)
  • Bonds (traded in capital markets, issued by corporations and governments). Some are convertible to common stock.
  • Certificates of deposits (short-term, typically issued by banks)
  • Commercial paper (short-term, typically issued by corporations)
  • Repurchase (repo) agreements (issued in the money market, corporations)

Pooled investments

Pooled investments include mutual funds, exchange-traded funds/notes, asset-backed securities, hedge funds, etc.

  • Mutual funds, which are either closed-end or open-end. Closed-end: no new issue or redemption of units; typically trades in a secondary market at a discount to net asset value Open-end: the mutual fund sells and purchases units directly from unitholders
  • Exchange-traded funds/notes: open-end mutual funds which trade in a secondary market; authorized participants are allowed to trade with ETF owner.
  • Asset-backed securities: a pooled investment vehicle of mortgage bonds, credit card debt, etc.
  • Hedge funds: private mutual funds that engage in a whole range of trading strategies because they are less regulated, and they typically use leverage.


Currencies represent monies issued by central banks, including reserve currencies.

Primary reserve currencies include the US Dollar and the euro. Secondary reserve currencies include British Pound, Japanese Yen, and Swiss Franc

Derivative contracts

Derivative contracts are contracts whose value depends on another asset called underlying; they are either cash-settled or physically-settled:

Forward contracts

Forward contracts are contracts in which two parties agree to trade the underlying at some future date at a price determined today. They suffer from counterparty risk, one of the parties can default, and illiquidity (i.e. they are not tradeable).

Futures contracts

Futures contracts are standardized forward contracts issued by and traded on a clearinghouse which guarantees payoff to each party. Clearinghouse typically requires an initial margin and each party is required to replenish their account if their balance decreases below the maintenance margin.


Swaps are agreements to exchange streams of cash flows based on a notional principal. These include

  • Interest rate swap: Fixed interest rate-based payments in exchange for variable interest rate-based payments and vice versa. They are used to convert a fixed-rate loan to a variable-rate loan and vice versa.
  • Commodity swap: Fixed payments in exchange for cash flows dependent on the price of an underlying commodity.
  • Currency swap: Exchange of payments (variable or fixed) denominated in different currencies.
  • Equity swap: Fixed cash payments for cash receipts based on a stock-market index.


Options are contracts (purchased by paying an option premium) in which the buyer has a choice but not an obligation:

  • Call option (option to buy) or put option (option to sell).
  • European-style option (can be exercised only at maturity) vs American-style option (which can be exercised even before maturity).
  • Insurance contracts, including credit default swaps.


Spot markets: primary participants are producers of agricultural commodities and industrial metals.
Future markets: dominated by information-motivated traders.

Real assets

Real assets include real estate, machinery, etc.

Pros: income tax advantages and diversification

Cons: significant due diligence and management costs, market illiquidity; not suitable for all investment portfolios

Indirectly held through real estate investment trusts (REIT) and master limited partnerships (MLP)
Commodities, real assets, and physically-settled derivative contracts are called physical assets. All other assets are financial assets.

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