Financial Instruments


Binary Options / Fixed Return Options / Over or Under Options / All or Nothing Options

Binary options are options where you make a (pre-specified) profit or lose your entire investment – there is no middle alternative. When you purchase a binary option, you must predict if a certain asset or index will be over a certain level at a predetermined point in the future, e.g. NYSE closing January 31, 2016.

If your prediction turns out to be correct, you get paid a pre-specified amount of money or receive a pre-specified asset. If your prediction is wrong, you don’t receive any payment.

Once the binary option has expired, it is worthless.

Binary options are popular since they tend to offer a large potential gain for a small amount of money down. Also, many people like that they know exactly how much they stand to lose or gain and on exactly which date.

Synonyms: Fixed Return Options (FRO), All or Nothing Options, Over/Under Options

Foreign Exchange Certificates / Currency Certificates

If you are the holder of a foreign exchange certificate, you have the right (but not the obligation) to convert a pre-specified amount of one specific currency into another specific currency at a pre-specified exchange rate.

A foreign exchange certificate (FEC) can usually be exercised any day until its expiration. There are exceptions however, so always check the terms for the specific FEC you are interested in.

Foreign exchange certificate is usually purchased to mitigate currency risk (hedging) but are also used for speculation.

Synonym: Currency Certificate

Forward

In finance, a forward contract is a non-standardized contract between two counterparts the obligates both of them to carry out a specific transaction on a future date. The transaction will consists of one of the counterparts (the one in the long position) purchasing a pre-specified asset from the other counterpart (the one in the short position), for a pre-determined price.

Forward contracts are used for hedging (risk mitigation) and speculation. They are especially popular for hedging interest rate risk and currency risk.

Futures

In finance, a futures contract obliges two counterparts to carry out a pre-specified transaction on a future date (the delivery date). With traditional futures, the transaction will consist of one of the counterparts (the one in the long position) purchasing a pre-specified asset from the other counterpart (the one in the short position), for a pre-determined price. There are however modern futures available where there is no tangible underlying asset to sell. Instead, these futures contracts are linked to an index or similar and settled in cash.

Unlike forward contracts, futures contracts are typically highly standardized and traded on exchanges.

Options

In finance, an option is a contract where the holder has the right, but not the obligation, to carry out a certain transaction at a pre-specified price with a pre-specified counterpart at a future date. A call option gives the holder the right to buy, while a put option gives the holder the right to buy.

With European-style options, the transaction must be carried out at a certain pre-determined date (outlined in the terms of the option). With American-style options, the transaction can be carried out any day until the option expires.

Swap

In finance, a swap is a derivative where two counterparts exchange cash flows streams. Swaps are used for hedging (risk mitigation) and speculation. Examples of commonly used swaps are Total return swaps, Interest rate swaps, Currency swaps, Commodity swaps, and Credit default swaps (CDS).

Penny stocks / Penny shares / Cent stocks

Penny stocks are common shares of public companies that trade at a low price. Penny stock companies are usually nano cap companies and micro cap companies. Compared to other stocks, penny stocks tend to be regarded as high risk investments. This is due to a combination of factors, such as low liquidity, small market capitalization, large big-ask spread, limited following, limited disclosure, limited regulation, and susceptibility to market manipulation.

Synonym: Penny share, Cent stocks

Warrant

In finance, the holder of a warrant has the right, but not the obligation, to purchase the underlying asset at a fixed price. European-style warrants have a specific date when they can be exercised, while American-style warrants can be exercised any day until they expire.

Warrants are similar, but not identical, to call options.