Financial instruments to trade in markets

Financial instruments to trade in indian stock markets - stock market basics - the indian trader

Trading in market is often misunderstood as only stock trading. However there are many financial instruments in the financial market to trade. Here is a classified explanation of such instruments.

Securities

A security is a financial instrument or paper traded for value. Securities are classified into 2 types:-

  1. Bond

A bond gives ‘loanership’ position to the customer. Bonds is an example of debt financing to fund companies or governments for new projects or ventures. Bond holders have no control over the entity to which they have lent money.

The issuer (company or government) pays the lender (who invests in a bond) interest and pays back the initial capital by the bond’s maturity date.

  1. Stocks

A stock gives ‘ownership’ to the buyer in a security which gives a claim to a share of company’s earnings and assets.

Derivatives

Derivatives are contracts whose value is based on something else or in proper terms a security whose value is determined by the under-lying asset. Derivatives have 2 main uses:

  • To hedge risk.
  • Speculation for profit.

They mainly are of 4 types:-

  1. Forwards

    A contract between two parties to buy or sell an asset at a specified future date. They are not traded.

  2. Futures

    Fundamentally similar to forwards but are standardised and regulated. Often used to speculate on commodities.

  3. Options

    A contract that gives the right but not the obligation to buy (call) or sell (put) a security or other financial asset.

  4. Swaps

    The exchange of one security for other.

There you have it, the basic classification of the financial instruments to trade. A more detailed explanation on each of them will be posted later.


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6 comments

  • Can you please make a post of like from really the start, like from scratch…. I wanna know all those basic concepts and then jump into advanced for a better understanding…..

    • Hey Shubham,
      Thank you for showing interest in The Indian Trader. And about your request, definitely, that’s what we are doing here. Stock market Basics section has been created just for the beginners, for those who want to start from scratch.
      There are many posts yet to come. However, if you have any specific question or topic, just shoot at us. We would love to answer those or write a post if need be.
      Do confirm your subscription by clicking the link in your mail.
      Keep reading, keep learning and have a nice day buddy!

  • Hi
    I have been following your articles the first two articles were very helpful for me. In the first article you concluded at the point of stock market and its need and then you explained the difference between the other markets and other terms. After i read this article i am not able to connect it with the previous one. The title of the article suggested me that now you are gonna tell me about how to do the trading. Can you please suggest me something to understand it thoroughly ?

    • Hey Aijaz,
      This article’s purpose was to educate readers about the number of instruments in which we can trade, Since there are many things in which we can trade. For eg: stocks, commodities, etc. How to trade series will be coming soon. Stay tuned!

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