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Financial Instruments Traded In The Stock Market

Introduction:

There are several financial instruments in the market. You may know some of them and may want to know others. From traditional stocks and bonds to more intricate financial instruments, each option has unique characteristics, risks, and potential rewards. Understanding these distinctions can help you invest in suitable products and make informed decisions. This is a guide where you can learn about the many financial instruments traded in the stock market.

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5 Popular financial instruments

  • Stocks

Stocks, also known as shares or equities, represent ownership in a company. When you purchase a stock, you become a partial company owner. This makes you entitled to a portion of your assets and earnings. 

Stocks can be bought and sold in the stock market during trading hours. You can earn from investing in stocks in two ways. You can buy them at a lower price and sell them at a higher price to make a profit. Secondly, you can earn dividends from stocks.  

While stocks offer the potential for high, inflation-beating returns, they are also known for their high volatility. Market prices can fluctuate rapidly, so it is crucial to consider this carefully and mitigate risk with ample diversification.

  • Bonds 

Bonds are a form of debt instrument. They are similar to a loan. Governments or corporations issue bonds when they require funds for various operations. When you purchase these bonds, you essentially lend money to the issuer. In return, the issuer gives you periodic interest payments along with the return of the principal amount.

Unlike stocks, bonds are generally more stable and are ideal for risk-averse investors seeking a predictable income stream. The fixed interest rates associated with bonds provide a sense of security and make them valuable in a diversified investment portfolio.

  • Mutual funds

Mutual funds are investment funds offered by Asset Management Companies (AMCs). They take money from multiple investors and invest it in a diversified portfolio of equity, bonds, and other securities. They come in various types, including debt, equity, and hybrid funds and cater to different risk appetites and investment goals. You can invest in them through a Systematic Investment Plan (SIP) or through a lump-sum investment. Mutual funds can be ideal for conservative as well as aggressive risk appetites. 

One of the critical advantages of mutual funds is access to expert fund managers. These managers are skilled professionals who make investment decisions on your behalf. Additionally, mutual funds offer diversification and spread your money across various companies and assets, depending on the fund’s objective. 

  • Derivatives

Derivatives are relatively complex financial instruments that derive value from an underlying asset or a group of assets. The two primary types of derivative instruments include futures and options contracts.

In a futures contract, the buyer and seller must purchase and sell the asset on a predetermined date at a predetermined price. On the other hand, the options contract grants the holder the right but not the obligation to fulfil the contract terms by the expiry date.

Derivatives carry high risk as they are extremely speculative. They may be suitable for experienced investors only.

  • Exchange-traded funds (ETFs)

ETFs are a basket of securities that track an underlying market index. They operate like mutual funds, except for how they are traded. ETFs can be bought and sold on the stock exchanges directly, just like stocks. You can trade ETF shares throughout the trading day at prevailing market prices.

ETFs typically have a lower expense ratio than traditional mutual funds, making them a lucrative investment option. They also follow a passive management style and aim to mimic the performance of a specific underlying index.

ETFs can be ideal for all types of investors. You can consider them as a novice or an experienced investor. They can also be suitable for diversifying your portfolio.  

To sum it up

Each investment instrument can serve a distinct purpose, and the suitability of an asset will ultimately depend on your individual goals, age, income, and risk tolerance. Constructing a diversified portfolio with a combination of these assets is highly recommended. This can help you mitigate risks and enhance the potential to earn better returns. So, make sure to evaluate all of these factors before deciding to invest in any market-linked instrument.

 

Related Articles:  How to Earn 1000 Rupees Everyday From Stock Market | A Quick Guide to Read Financial Reports for Stock Market Investments

 

Popular Stocks:  HDFC Bank share price | ICICI Bank Share Price | UPL Share Price | Tata Consumer Share Price | Divislab Share Price

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