What are the Financial Instruments Traded on the Stock Market?
Investing in the stock market involves the exchange of financial instruments which is continuous and ongoing. Some people (Intraday or day traders) do not hold their financial instruments for long by buying or selling on the same day while others trade for the long term and hold financial instruments.
What is a financial instrument?
A financial instrument is defined as a document that indicates an asset to one individual (this person is owed) and a liability (this person owes) to another individual. All financial instruments aren’t traded in the stock market e.g. cheques. The financial instruments that are specifically traded on the stock market are shares/stocks, derivatives, bonds and mutual funds.
One buys a share to sell them at a profit to earn a return on your investment. Share prices fluctuate constantly which is known as volatility. It is volatility that makes profits possible in stock market trading. If utilised correctly, volatility can be beneficial to traders. Stock volumes or the amount of shares in the market is also considered when trading in stocks.
Derivatives involve making a contract to buy or sell commodities on a specific date at a specific rate. Derivatives are also referred to as Futures and Options stocks. A Futures contract includes the obligation to buy or sell a certain amount, by a predetermined date at a specified rate. An Options contract is similar, but there is no obligation.
Futures is a better investment for beginners. For derivatives observe Open Interest, i.e. the number of contracts being held. If people are dumping contracts, Open Interest is low, meaning lower buy-in rates and if people are buying contracts then Open Interest is high, meaning higher buy-in rates.
Bonds are safer because they assure a certain rate of interest by a certain date. The interest may fluctuate but will not dip below the rate of interest mentioned when they are issued on the stock market. However, bonds might not be as profitable as derivatives.
A mutual fund refers to the mutual trade of financial instruments in the stock market. Because it calls for many different investors investing in different stocks, the risk is much lower than trading in the stock. Mutual funds are popular Indian stock market instruments.
Don’t restrict yourself to one financial instrument; you could scale up your profits by trading other financial instruments as well. All you need to succeed in the financial market is the right attitude, a little research and a reliable partner. As for a reliable partner, you can trade with ease using IIFL’s trading-cum-Demat account. Access to the industry’s leading trading platforms and optimum flexibility is what makes IIFL one of the most popular trading accounts in India!