Living in the USA means living in a capitalist society, where both governments and businesses require capital (money and resources) to achieve their goals. That means that Job #1 for any organization (or person) in a capitalist society is to obtain capital.
Organizations raise capital through the issuance of certificates, also called securities, which serve as a representation of value and are offered for purchase. A security is a tradable financial asset. This practice is applicable to various forms of assets, including cash, companies, cryptocurrencies, and non-fungible tokens (NFTs). Securities may be represented by a physical certificate or, more typically, they may be “non-certificated”, that is in electronic form. Certificates may be bearer, meaning they entitle the holder to rights under the security merely by holding the security, or registered, meaning they entitle the holder to rights only if they appear on a security register maintained by the issuer or an intermediary.
The credibility of these certificates is crucial, as it is the foundation of our economic system. Without the trust and belief in their value, the entire system would collapse. This is why indicators such as the Consumer Confidence Survey and the Cboe Volatility Index (VIX) exist — to gauge the public’s confidence in the economy.
What is the rationale behind the perceived value of these certificates? It is asserted by the issuers that they possess the potential to generate income and/or grow in value.
These are the underlying principles that support the world of capitalism, financial markets, Wall Street, and all types of financial investments. These principles are considered axiomatic, and they form the basis of our entire financial system.
There are only two types of certificates issued by an entity:
, also known as bonds (or fixed income),and
, also known as stocks (or equity).
An organization can issue either one or the other, or both, in order to raise capital.
If you own a stock, you’re an owner. A company is giving up some of its ownership to you, in exchange for the capital, and you and the company are now in the same boat — to sink or swim together. An investor becomes a partial owner of a company. The contribution of an owner to the firm’s business is referred to as equity. Hence, stocks are termed as equities as they represent partial title of a corporation’s stock. Owning a piece of a company, giving you the potential for capital appreciation (share price increase) and dividend income (a portion of the company’s profits). While offering the potential for high returns, stocks also carry higher risk due to market fluctuations. U.S. equity markets make up nearly half of the $126.7 trillion in global equity market cap (2024), or about $62 trillion — more than five times the next-largest market, China ($11.8 trillion), with the EU close behind at $11.1 trillion. By 2026, the total market capitalization of the U.S. stock market reached roughly $73 trillion
If you own a bond, you’re a lender. Essentially an organization (which could be a corporation or the government) is borrowing money from you and promising to pay you back with interest at a certain date, regardless of any profit they may earn in the future. Bonds offer predictable income and lower risk compared to stocks, but generally lower potential returns as well. U.S. fixed income markets comprise 34% of the $145.1 trillion securities outstanding across the globe, or $49.6 trillion; this is more than 2x of the next largest market, the EU.
Bonds, as an investment option, have been around for a longer time than stocks, dating back to the beginning of civilization, and today are the world’s largest capital market. It has grown significantly over the past few decades, fueled by the growth of the government and corporate debt sales across major economies and emerging markets.
The U.S. capital markets are the largest in the world and continue to be among the deepest, most liquid and most efficient.
This broad categorization offers a starting point, but the investment landscape is much richer:
Essentially a kind of bonds usually offered by banks and investment companies. These are highly liquid (easily converted to cash) investments offering low risk and low returns. Examples include savings accounts, money market accounts and funds, and certificates of deposit (CDs).
These pooled investments offer diversification, allowing you to invest in a basket of stocks or bonds with a single purchase. Mutual funds are managed by professionals, while ETFs trade like stocks on exchanges.
This category encompasses a diverse range of assets beyond traditional stocks and bonds, such as real estate, commodities (like gold or oil), private equity, and venture capital. While potentially offering high returns, these investments often come with higher risks and require specialized knowledge or involvement.
(e.g., forwards, futures, options, and swaps) — contracts that derives its value from the performance of an underlying entity. This underlying entity can be an asset, index, or interest rate, and is often simply called the underlying. Derivatives can be used for a number of purposes, including insuring against price movements (hedging), increasing exposure to price movements for speculation, or getting access to otherwise hard-to-trade assets or markets.