Indian stock market is one investment avenue where investors get a lot of opportunities. The long-term investors invest their money in the market to create wealth for the future. Whereas the short term investors indulge in intraday trading and make quick gains.
Therefore, before investing in the Indian stock market you must do good research and understand the basics of the stock market. The Indian stock market is mainly popular for trading and investing in equities. Not many people are aware of the fact that there are also various types of financial instruments that are traded on the stock exchange. In this article, you will learn about the different financial instruments traded in stock market.
Types of Financial Instruments in Stock Market
Equities / Shares / Stocks
Equities are the most popular financial product on the stock exchanges. People across the globe invest in the equity market and look for creating huge wealth for them in the future. It would not be wrong to say that the stock market is one of the most common investment options among the people. When you purchase the shares of the company, you become a partial owner of the company and known as its shareholder.
What makes a stock market a very popular place is its ability to multiply your capital through shares. The amount of returns that can be made by purchasing equities is much higher in comparison to any other financial instrument across the globe. Equities are also popular because they are liquid in nature i.e. you can easily sell your shares in the market whenever you are in requirement of cash.
Apart from long term investment, equities are a great source of regular income as well. The volatility of the stock market is useful for intraday traders. They look to make a profit with every move in the price of the stock. In fact, many people across the country are dependent on the stock market for their regular earnings in the form of intraday profits. On the other hand, long-term investors invest money by picking stocks after carefully analyzing the various factors of the company. For long-term investors, fundamental analysis is useful and for short term traders, technical analysis is useful.
Derivatives are another popular financial instruments that are traded on the Indian stock exchanges. A derivative is a financial instrument that derives its value from an underlying asset or a group of assets. The underlying asset can be stocks, currencies, interest rates, etc. Among the derivatives, futures and options contracts are the most popular financial instruments traded on the stock exchange.
A futures contract is a contract in which there is an obligation to purchase or sell an asset at a predetermined price on a future date. These contracts must be delivered at a predetermined price.
Similar to the futures, the value of the options is dependent on an underlying security like stock, market index, etc. Under the options contract, the investor has an opportunity but not the obligation to purchase or sell the asset on a specific date and at a specific price.
Mutual funds are financial instruments that collect money from a pool of investors and invest in various securities. The different investment venues for mutual funds include equities, bond markets, money market instruments and other options available in the market. The fund managers manage the mutual fund portfolio and it is up to him to maximize returns of the investors by generating long term capital gains for them. You can purchase mutual funds through the stock exchanges. By investing in mutual funds you will get units in return and the profits on those units will be distributed among the unit holders in the proportion of the units held. Mutual funds can give great returns if they are held for the long term. Going by the history mutual fund performance has been good over the years.
Whenever the private sector companies and the government are in requirement of capital, they issue fixed income instruments known as bonds to raise the capital. The bonds issue comes with a specific interest rate. The bonds act like a loan and must be repaid in full within the mentioned period. The borrower must repay the lender upon completion of the maturity period. The purchase of these bonds can be made from the stock exchanges. The companies issue bonds to the public via this stock exchange.
The above are some of the common financial instruments traded in stock market. If you are a beginner and want to learn more about the Indian stock market, you may visit Nifty Trading Academy. We are one of the leaders in providing free stock market education in the form of blogs and articles. We regularly update the content on our page so that you get to learn something new every day.