What are Financial Instruments ?

What are Financial Instruments ?

 

Financial Instruments were present traditionally in India in many forms, since childhood we have heard of saving money for future .Saving equally to secured financial stability ahead in life . However, saving does not amount to have a great financial stability in future .As an illustration assume for a while even If you are saving Rs. 10000 every month  for 5 years keeping aside all other aspects like inflation ,cost of living ,expenses in medical ,shopping etc , solely saving will grant you Rs. 6 lakh .

An average person job expectancy nowadays will be about 30 years if he is ready to work from the Age of 25 till 55 years (calculate yourself till how long you want to work) . so within a period of 30 years the amount you would save will be around 36 lakh neglecting all other assumption of life like medical emergency , marriage , schooling of children , shopping , going for vacation etc. Not to mention the prices of property and land can we consider ourselves to be living peacefully if our only mode is saving not investing .

This is the reason there are a lot of financial instruments available in the market right now .

Let us see most important Financial Instruments which can increase our saving manifolds over a period of time .

 

List of Financial Instruments traded in the stock market

 

  • What is Bonds :

    It is called as debt instrument . for e.g you want to start a new project ,suppose cost of project is approximately Rs. 1 lakh however you do not have the required capital to start it , you asked your friend or relatives to lend that money to you with promise of returning it back with principal amount of Rs.1 lakh and an interest of 6% every year for 3 years . When your friend gives you the amount he will take a receipt from you i.e (bond) .Now he has bought a bond in your project under your company .

Likewise company needs money to undertake projects .They will pay the money earned from that project to you.As a matter of fact Bond is similar to loan . when a company borrows it from bank by paying regular interest to bank we term it as loan .However if a company decides to take that money from investors in exchange like us that is called Bond .Thus, a bond is a means of investing money by lending to others .

 

  • What is Mutual Funds :

    Nowadays ,most of us have heard & very much aware about this term, thanks to rigorous advertisement online and offline about mutual fund investment and its risks involved. So basically in simple terms , if you do not have time to manage your savings and you want to make the most of it through investment in various funds related schemes , there are companies and fund managers who will take care of your investment need . They will collect money from investors whomsoever wants to & invest those in different asset classes available in market .

Mutual fund schemes issues units which have certain value just like shares of any companies . One of the reasons for being mutual funds as very high-risk fund as it invests its money in equity stocks or shares of the companies . There are many types of mutual funds available in the market ,we will learn about them later .

 

  • What is Derivatives :

Derivatives as the term itself says its been derived from some other thing.  A derivative is an instrument whose value is derived from the value of one or more underlying assets , it can be stocks ,commodities, metals, currencies, bonds, stocks indices, etc. Here is the most common examples of derivative instruments Forwards, Futures, Options and Swap . Participants in a derivative market can be classified into four sets based on their trading motives :

  • Hedgers
  • Speculator
  • Margin trader
  • Arbitrager

You can do derivatives trading in India through National stock Exchange (NSE), Bombay Stocks Exchange (BSE) in stocks. However ,if your interest is to trade in commodities, MCX and NCDEX are there.  We will try to learn more but for now Just stick to the basics .

 

  • What is Shares (Equity) :

We will not discuss here about the primary market and IPO (initial public offering). Shares in basic terms help companies to raise money through exchange of shares it holds .Companies in order to raise funds issues shares to investors in public domain . Whether you term it stocks ,shares or equity there isn’t much difference however the difference lies in the context in which it has been spoken .

Owning a share is like holding a portion of the company. Suppose PC Jewelers issued 100 shares in total & you bought 10 shares than you own 10% of the company . These shares are then traded in the share market.

Suppose you researched in market and you think that due to certain policies made by government just now will impact the PSU banks in India, you checked the best banks among all by analyzing fundamentals and technical(what is fundamental & technical Analysis will learn later )of that company and selected union bank (e.g) , which was trading @ Rs. 90 , now you can buy this share for a day (termed as intraday) or you can take delivery of the stock and keep it till it reaches the target you have kept . Assume it reaches Rs. 120 & you bought that @ 90 so Rs. 30 will be your profit per share . We will learn in detail about all this aspects of markets later separately . 

If you need an article on any specific topics releated to stock market , please let us know through comments below .

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