Chapter 9
Investment Vehicles

Every business and every government needs capital before it can do anything else, and nearly all of it is raised by selling paper: a promise to repay, or a share of what the enterprise becomes.

Organizations raise capital by issuing securities: tradable claims on an issuer, sold to investors for cash. What counts as one is a legal question with a real test behind it (section “Regulations”), which is how the definition has stretched from stock certificates to orange groves and a large share of the token market. 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.

A security is worth something for exactly two reasons: it can generate income, or it can grow in value. Every instrument in this chapter is a claim on one or both.

There are only two types of certificates issued by an entity:

Debt Certificates

also known as bonds (or fixed income), and

Ownership Certificates

also known as stocks (or equity).

Everything else is a combination of those two, a claim on one of them, or a contract whose value is derived from one of them. Convertible bonds, preferred stock, and warrants sit on the boundary deliberately; derivatives (section “Derivatives”) reference the underlying without being it.

An organization can issue either one or the other, or both, in order to raise capital.

Equities (Stocks)

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. The durable takeaway is the sheer concentration: the U.S. share has sat near half of world equity value for years, which is why a “globally diversified” portfolio built on market weights is still mostly a bet on American corporate earnings.

Fixed Income (Bonds)

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 $\approx$34% of the $145.1 trillion of fixed-income securities outstanding across the globe, or $49.6 trillion; this is more than 2x of the next largest market, the EU.

Debt predates equity by millennia and remains the larger market: global fixed income outstanding exceeds global equity capitalization, and the U.S. is the largest, deepest, and most liquid market in both.

This broad categorization offers a starting point, but the investment landscape is much richer:

Cash Equivalents

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).

Mutual Fund (MF) and Exchange-traded Fund (ETF)

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.

Alternative Investments

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.

Derivatives

(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.