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An Introduction to Investing: Stocks, Options, Dividends, Futures, FOREX

By Edited Oct 31, 2015 0 0

Interested in learning about the stock market but don't know where to begin? Below you'll find a description of some of the most common investing tools available to investors all over the world.



Also known as “shares”. A “stock” is what a company creates in order to issues “shares”. A share is basically a certificate saying that you own a very tiny piece of the company. Some shares allow you to vote at the annual general meetings (those are often referred to as "A" shares or "preferred stock") while other shares simply give you ownership of a little bit of the company and a right to any future profits the company might turn out. Stocks are probably the easiest thing you can buy and sell. Buying stocks isn't hard, it's selling them that's difficult. So, if you want to learn how to make money in the markets, learn to sell!



Also known as “derivatives.” You may remember that term bandied about during the the crash of 2008. Options are contracts to give the buyer the right, but not the obligation, to buy or sell shares of a company at a certain date in the future for a certain price. That contract is bought for a "premium," which is calculated with a mathematical formula by the options-provider, such as the CBOE in the US or MX in Canada.

There are two types of options, calls and puts. “Calls” are usually seen as bullish, meaning that the folks who buy them think the price of the stock will go up. “Puts” are usually seen as bearish, meaning that the folks who buy them think the price of the stock will go down. Both are used to generate cash flow for the seller, while the buyer is often looking to hedge their portfolio. Generally, option contracts consist of 100 shares of the underlying asset. So, if you buy (or sell) one option contract, then you're really offering 100 shares of the underlying asset. The biggest risk with options are that they take into consideration time and volatility: meaning they expire at a definite time and are subject to which way the company's stock price is moving. I highly recommend you check out the Chicago and Montreal exchange websites for lists of options and free tutorials on how they work.



Money paid to you for buying shares in a company. Pretty easy money as you don't have to do much except hold the stock. Some companies even have something called a “DRIP”, a dividend re-investment plan, which reinvests any money you make from the dividend into the company again allowing you to buy more shares in the company. The problem with dividend stocks, however, is that some people mistakingly think that since they are getting paid to hold the stock, it doesn't matter if the stock price drops. Wrong! You still want a company's stock price to go up while paying you the dividend.



The word "futures" often refers to commodities but generally refers to any contract for an underlying asset that can be bought now and delivered later. Commodities are traded using "futures" contracts which are denominated in various amounts. Gold is sold per ounce, copper is sold per tonne, wheat is sold by bushel, etc. As a result, you will require different amounts of margin or cash to trade the various contracts.

But futures aren't restricted to commodities. You can also buy and sell bits of the broader market by way of index futures. So if you study the markets and instead of wanting to buy just one stock, you can buy a contract that gives you a very tiny bit of ownership of each and every company listed on that index. For example, if you follow the S&P 500 index and think it will go up in price but aren't sure which companies will push the index higher, then you can buy a futures contract on the index.



Meaning, “foreign exchange”. Every time you buy Thai Baht, Vietnamese Dong, Korean Won, Ukrainian Hryvnia or Polish Zloty, you are performing a rudimentary form of foreign exchange. Using Canadian, American, British, or Japanese money, you are exchanging one currency for that country's so you can buy things in your destination. The difference with FOREX markets is that you're not actually going to the country whose currency you are buying. Instead, when you buy one currency you're typically selling another.

For example, consider the currency pair USDJPY. The currency on the left (US Dollar) is your base currency while the currency on the right (Japanese Yen) is your quote currency. If the USDJPY is trading at 1.10, that means you'll receive 110 Yen for every US dollar you sell.

Currencies typically don't move very fast so in order to profit from trading this investment class you need a substantial account size with which you can place large orders in order to benefit from the small fluctuations of price. Often, people will use something called "margin" (basically, borrowed money) to trade FOREX.



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  1. "FOREX." Investopedia. 10/04/2013 <Web >

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