Glossary of financial terms

Bonds are debt instruments usually issued by governments or corporations to access funds and are traded on the debt securities market or directly through a broker. Investing in bonds is essentially lending money to the issuer, who will then pay interest to the investor periodically and return the principal after a set period.

Unsecured, short term debt instrument issued by a corporation.

A security representing borrowed funds that must be repaid over a fixed time at a fixed interest rate.  Can be issued by a government or a corporation.Examples include bonds, debentures and commercial paper.

Derivatives are financial instruments whose value is derived from another type of security such as bonds, stocks, commodities, currencies etc that underly it. Derivatives can be used to hedge risk (concerned with the underlying security) or for speculative purposes (purely the profit on buying/selling at the right time). Examples are futures and options.

A stock or other security  (e.g. bonds) representing an ownership interest.

Future are a type of derivative. They are a legally binding contract to buy or sell a commodity at a future point but at a price that is agreed upon in the present. They can work as a form of insurance; for a seller if the commodity price risks decreasing and for a buyer if they predict that the price will rise in the future. They are also used for speculative purposes. Often traded in agriculture, natural resources and currency.

Functions absorbed by the Financial Markets Authority under its establishment legislation.

Options are a type of derivative. They are a contract that gives you the option to buy/sell a particular stock at a set price for an agreed period in the future. If the stock has not depreciated enough to sell or appreciated enough to buy at the set price to make a profit before the option expires you have no obligation to do so.

Secured debt is debt that is backed by an asset that will serve as collateral in case of default. This reduces lending risk. For example, a house is security on a mortgage.

Unsecured debt is debt that is not backed by any underlying asset. It is higher risk than secured debt and therefore the interest on it is usually higher. For example, credit card debt.