Investors can choose from a wide range of assets for their investment portfolios. The two basic types of investment instruments are fixed-income and equity. Fixed-income assets provide relative safety of capital and regular interest payments, while equity provides the potential for long-term capital appreciation. The asset mix depends on short-term cash flow needs, long-term financial objectives and tolerance for market risk.

A financial investment whose price is based directly on its market value are considered as primary instruments, examples include stocks, bonds, certificates of deposit, bills and anything else that has its own value. By contrast, the price of derivative instruments, such as options, swaps and futures, is based on the value of their underlying assets.

Cash Instruments
Cash instruments include savings and checking accounts, certificates of deposit and money market accounts. They provide financial flexibility because you can use them for emergencies, living expenses and buying other assets at attractive prices. They include securities that easily transferable, deposits and loans agreed upon by borrowers and Lenders. They are liquid investments whose values are directly influenced and determined by the market. They are considered safe and earn modest returns.

Derivative Instruments
The value and characteristics of derivative instruments are based on the vehicle’s underlying components, such as assets, interest rates or indices. These can be over-the-counter (OTC) derivatives or exchange-traded derivatives.

Bonds
Companies and governments issue bonds to raise capital for operational and strategic needs. Bond investors receive regular interest payments and get the principal back on maturity. Bond prices rise when interest rates fall and fall when rates rise. Government bonds are safer than corporate bonds. U.S. Treasuries are risk-free because the U.S. government backs them. Credit rating agencies assign risk ratings to bonds based on several factors, including a bond issuer's financial strength and ability to fulfill its debt obligations. Low-rated bonds have to pay higher interest rates to compensate investors for taking on the higher risk.

Equity
Companies issue stock to raise capital for various needs. Stocks trade on regulated exchanges, such as the New York Stock Exchange, or on over-the-counter markets. Investment portfolios benefit from rising stock prices but suffer during periods of market volatility. This is why diversification across different industries is so important. Some companies pay dividends, which are cash distributions to shareholders from after-tax profits. The main risk of equity investments is that deteriorating business conditions lead to falling profits and stock prices.

Mutual Funds
Mutual funds offer diversification at reasonable costs because the fund companies are able to spread the fees and expenses over a large asset base. Stock funds invest in stocks, bond funds invest in bonds and balanced funds invest in a mix of stocks and bonds. There is further specialization within these categories. For example, technology stock funds invest only in technology stocks, while international funds invest in certain regions of the world.
The disadvantage is that you have no control over investment decisions but must pay fees and other expenses regardless of performance. Exchange-traded funds are similar conceptually to mutual funds, except that they trade like stocks on exchanges and track market indexes and sub-indexes. ETFs offer convenience and sector diversification at lower costs than regular mutual funds.

Commodities
You can invest in gold, silver and other commodities. Some use gold and other precious metal assets to hedge against inflation and as a storage of value during periods of economic uncertainty. Commodity prices are volatile, and there is the risk of significant capital loss in a short period. Individual investors can gain exposure to this sector cost-effectively through commodity mutual funds and exchange-traded funds.

Other
Other investment instruments include real estate and small businesses. Residential and commercial real estate investments can offer investors attractive rates of return, especially during periods of economic expansion. Small businesses, such as franchise outlets or retail stores, could be a worthwhile investment of both time and money. You can also invest in derivatives, such as options and futures, to speculate or to hedge positions in stocks and other assets.

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