Stock markets provide ample opportunities for wealth creation. Many investors put their savings in the market to accumulate wealth over the long term. They may stay invested for anywhere from a few months to several years. Others who have more short-term goals in mind can trade instruments over the short term to make quick gains. Intraday traders, for example, focus on the very short term, squaring off their trades in the course of a single trading day.
Traders and investors in the Indian stock markets generally deal in equities. But equities are just one among the various types of financial instruments that can be traded on the exchanges in India. This article highlights the different financial instruments that you could add to your stock market portfolio.
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 his 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 number of shares in the market are 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.
- Futures contracts: involve an obligation to buy or sell an asset on a future date at a pre-determined price. For example, you might take out a futures contract to buy 500 barrels of crude oil at a specified price within a month. Both you and the crude oil seller are obligated to execute the contract by the expiry date. Futures can thus be an excellent way to fix the price of the underlying asset and guarantee a trade.
- Options Contract: Like futures, an options contract is also based on the value of an underlying asset. But here one may have the right but not the obligation to honour the terms of the contract by the expiry date. There are two types of options contracts: call options and put options.
- Call option: This gives the buyer the right to buy the underlying asset, but the buyer is not obliged to make the purchase by the contract’s expiry. However, the seller is obliged to sell the asset if the buyer decides to execute the contract.
- Put option: This gives the seller the right but not the obligation to sell the stock at a specific price by the contract’s expiry. In this case, the buyer has to purchase the assets if the seller decides to execute the contract.
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 to invest 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 Upstox trading-cum-Demat account. Access to the industry’s leading trading platforms and optimum flexibility is what makes Upstox one of the most popular trading accounts in India!
Financial and Business expert having 30+ Years of vast experience in running successful businesses and managing finance.