The Indian stock market is a popular investment avenue that provides multiple opportunities to earn good returns and accumulate wealth over a period of time. And investors who want to gain quick returns can trade financial instruments over the short term. As an investor or a trader, you have various financial instruments to choose from. Before we move on to the types of instruments available for trading, let’s take off from the start line.
What is a Financial Instrument?
A monetary contract between two parties that can be traded and settled is known as a Financial Instrument. This contract is an asset to one party (the buyer) and a financial liability to the other party (the seller). However, you should note that not all financial instruments are available for trading on the stock exchange. For example – Cheques are also a financial instrument but are not allowed to be traded on the exchange.
Financial instruments you can trade in the stock market
Equities are the share in the ownership of the company and are one of the most traded financial instruments on the exchange. But why do investors and traders swarm towards equity? This is because it has the ability to multiply your capital by generating higher returns as compared to other financial instruments. Other features that make it the most preferred avenue are:
● Buying shares/stocks give you the part-ownership in the company
● Has better liquidity, which means you can easily sell your shares in the market
● Its inherent volatility offers investors to book short term profits based on stock price fluctuations
Derivatives are instruments that derive their value from an underlying asset(s) such as currencies, stocks, interest rates, etc. Derivatives contracts are contracts in which a predefined quantity of stocks, commodities, indices, currencies, bonds, etc. are bought and sold on a specific date at a predetermined rate. The most popular derivatives contracts are futures and options contracts with the latter being a right and not an obligation.
3. Debt Securities
Securities issued by companies or the government with an objective to generate funds are known as Debt Instruments. Its features are:
● Interest on these instruments can be earned at specific intervals
● The principal amount invested will be repaid at the end of the contract period
● They can be both secured as well as unsecured
● Issued to raise funds for day-to-day operations, business expansion, acquisitions, paying off debts, or more
● Yields lower returns as compared to most other instruments like Equity, Gold, and Real Estate over the long run
Debt instruments traded on the exchange can be classified into bonds and debentures.
These fixed-income debt instruments are issued by the central and state government, and large corporations to raise funds. They can either be secured by a physical asset or a guarantee. There are various types of bonds such as floating bonds, inflation-indexed bonds, sovereign gold bonds, and more.
Debentures are issued by the corporates to accumulate funds by borrowing money from the public. Debentures are generally unsecured and are issued to raise capital for a specific purpose.
4. Mutual Funds
A fund created by contribution from a number of investors is known as a Mutual Fund. The money is then invested in securities like equities, bonds, money market instruments, and other securities available in the market. It offers investors an opportunity to invest in diversified and professionally managed securities at a relatively low cost. You can choose to get these funds managed by expert and professional portfolio managers who will do meticulous research before investing your money.
5. Exchange-Traded Funds (ETFs)
ETFs are just like mutual funds, but the major point of difference is that ETFs are traded on the stock exchange. ETFs have a comparatively lower expense ratio. Investors prefer investing in ETFS as these are registered with the Securities and Exchange Board of India (SEBI). Wondering how ETFs differ from mutual funds? Read here.
Each of the above-mentioned instruments is unique and has features that make them a favorable trading option. Although, the way they are traded on the exchange differs. After knowing the ins and outs of the numerous investment options to trade, don’t limit yourself to 1 option. Diversify your portfolio by investing in multiple instruments depending on your risk appetite to achieve your financial goals.