What is the difference between a CD and a stock?

Stocks are higher-risk investments with potentially higher returns, making them better suited for long-term investors who can ride out price fluctuations. Certificates of deposit (CDs) and stocks vary greatly in their risks, potential returns, and flexibility. Find out their key differences.

What is a credit risk sale (CDs)?

The “seller” of credit risk – who also tends to own the underlying credit asset – pays a periodic fee to the risk “buyer.” In return, the risk “buyer” agrees to pay the “seller” a set amount if there is a default (technically, a credit event). CDS are designed to cover many risks, including: defaults, bankruptcies and credit rating downgrades.

What is the CDS market?

The CDS market was originally formed to provide banks with the means to transfer credit exposure and free up regulatory capital. Today, CDS have become the engine that drives the credit derivatives market.

What is a CDS & how does it work?

CDS involves three parties: bond owner, buyer, and seller. It's a derivative contract based on differing opinions about default risk. They hedge risk, speculate on credit changes, and exploit market gaps. High premiums indicate higher default risk. Created for bank hedging, CDSs developed a riskier secondary market due to pooling and anonymity.