The key financial instruments traded on the stock market are –
- Equity Shares – Issued by companies, Equity Shares entitle you to receive a claim to any profits paid by the company as dividends.
- Bonds – Issued by companies and governments, bonds represent loans made by the investor to the issuer. These are debt instruments issued at a fixed interest rate for a fixed tenure.
- Mutual Funds (MFs) – Issued and operated by financial institutions, MFs are used to pool money, which is then invested in different financial instruments. Profits are distributed between the investors in proportion to the number of investments they hold.
- Exchange-Traded Funds (ETFs) – ETFs essentially track an index like the NIFTY or the SENSEX. Once you buy a unit of the ETF, you hold a part of the 50 stocks in the NIFTY in the same weightage that the NIFTY holds them. These are called “passive” products, which are typically much lower in cost than MFs and give you the same risk or return profile as the index.
- Derivatives – A derivative derives its value from the performance of an underlying asset or asset class. These derivatives can be commodities, currencies, stocks, bonds, market indices, and interest rates.