Today, there are dozens of types of financial instruments employed, ranging from debt securities to derivatives. However, by far the most common are stocks and bonds. These two form the staples of any investor's portfolio, both an individual's and an institution's. By Amdahl's law, the bulk of one's time should be spent understanding how these two securities operate and studying how to maximize returns in these two areas.
Bonds
Bonds are essentially loans given to a company as a way for them to raise both short term and long term funds. You pay a certain amount of money up front, called the principal, in return for regular interest payments. When the bond term ends, known as reaching maturity, the principal will be returned to you in full.
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| U.S. Steel Corporation bond |
The interest rate, called the coupon, is fixed throughout the lifetime of the bond and is typically paid either annually or semi-annually (every 6 months). Short-term maturities (1-5 years) are safer and thus have lower coupon rates than longer-term maturities (10-30 years).