Newcomers to the stock market usually only understand company shares. That is like trying to build a house, but only having a hammer to work with. Trading technology has moved forward tremendously and nowadays there are multiple types of instruments that allow investors the flexibility of using those tools to get what they want. You can and should make use of other tools available to build your financial house. Hopefully these brief descriptions will help to give you a simple understanding of what these are. In the future, I will likely include individual articles about each of these instruments.
Stocks/shares
These are the most straightforward instruments. The owners of a company decide they wish to sell part of their company for some reason and they do so on a stock market. This allows individual investors to buy a share in that company for a price, which is determined by people buying and selling the shares. The more people who want to buy the shares, the higher the price and vice versa. Owners of shares in a company are called shareholders or equity holders. An example of a company is Mcdonald's Corp, the seller of the famous Big Mac. They are listed on the New York Stock Exchange (NYSE) as the ticker symbol MCD and for under US$200, you can buy a share and be the proud owner of a small part of Mcdonald's.
Index
An index is a grouping of company stocks. A well known index is the "S&P 500 Index", which is a grouping of 500 of the largest companies in the US, one of which is Mcdonald's Corp. The index has a ticker symbol SPX, however you cannot directly buy an index. The price of the SPX reflects the combined price movements of all the 500 stocks contained within, but the calculation of the price is not straightforward. You can check out this Investopedia article if you would like to find out more.
Exchange Traded Fund (ETF)
An ETF is an instrument that tracks a group of stocks, so in that regard, it is much like an index. It is more flexible in the sense that it can be used to track other things, like a group of bonds, an index or a commodity. The key difference between an ETF and an index is that you can buy and sell an ETF like a stock. The operators of the ETF will state that the price of the ETF will track a certain index or group of stocks and computer programs will ensure this happens. An example of an ETF is the "SPDR S&P 500 ETF Trust", which trades under the symbol SPY and tracks 1/10 of the S&P 500 index. So when the SPX is 2500, the SPY will be 250.
Futures
A futures is a legal contract to buy or sell a stock or index at a certain price at a certain later date. That sounds extremely complicated and for the longest time I could not figure out what that meant. Practically, each futures contract has an underlying instrument and buying a futures contract is almost the same as buying the underlying stock in the short term. The few differences are, you can trade a futures contract outside of regular trading hours and the futures contract has an expiry date. On the expiry date, your position will simply be converted to cash by the broker. An example is the "E-mini S&P 500", which trades under the symbol ES and is a futures contract for the SPX. The price of the ES is usually very close to the SPX during regular US market trading hours, but can vary significantly from the SPX outside regular trading hours.
Options (aka Warrants in Singapore)
An option is also a legal contract to buy or sell a stock or index at a certain price at a certain later date, except that it usually contains a bunch of those stocks instead of one and it is optional for the buyer of the contract to exercise the option. You can think of an option like a coupon. Imagine cutting out a coupon that lets you buy 5 packs of milk for $5. You can cut it out, but you don't have to use it. This coupon usually has an expiry date, so beyond that date, the coupon cannot be used and is worthless. That is exactly what an option is, but for stocks. An option gives the holder of the option a right to buy or sell some stocks at a fixed price, before an expiry date. To get this coupon/option, option buyers have to pay a price for it. Just like how you would pay an insurance company a premium to get coverage under an insurance policy, option buyers pay option sellers a premium to buy the option.
For example, if the current price of SPY is $250, I might be willing to pay $10 to someone for the right to buy 100 units of SPY for the price of $260 each at any time before the end of the month. So if the price of SPY goes to $265 before the end of the month, I can exercise the option and get to buy the 100 units of SPY for only $260, making a $5x100 profit. However, if the price of SPY stays at $260, the option expires worthless and I lose my $10.
There are options for stocks, ETFs, indexes and futures. Using our examples above, you can find options for MCD, SPX, SPY and ES. The ticker symbols are usually long, convoluted string of characters meant to represent the characteristics of each option, so you do not usually refer to a ticker symbol for options. Instead, you would say something like "standard December options for SPX", which means the bunch of options for SPX that expires on the 3rd Friday of December.
For example, if the current price of SPY is $250, I might be willing to pay $10 to someone for the right to buy 100 units of SPY for the price of $260 each at any time before the end of the month. So if the price of SPY goes to $265 before the end of the month, I can exercise the option and get to buy the 100 units of SPY for only $260, making a $5x100 profit. However, if the price of SPY stays at $260, the option expires worthless and I lose my $10.
There are options for stocks, ETFs, indexes and futures. Using our examples above, you can find options for MCD, SPX, SPY and ES. The ticker symbols are usually long, convoluted string of characters meant to represent the characteristics of each option, so you do not usually refer to a ticker symbol for options. Instead, you would say something like "standard December options for SPX", which means the bunch of options for SPX that expires on the 3rd Friday of December.