Financial Instruments Traded In Indian Stock Market

The Indian 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 on 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.

Types Of Financial Instruments Traded In Indian Stock Market

Equities

The most popular financial products on the stock exchanges are equities. Stocks and shares are instruments that you can trade in the equity market. When you purchase financial instruments such as stocks and shares, you get part-ownership of the company in question, and thus become its shareholder.

Why do investors and traders flock to equities? It is mainly due to the ability of equities to multiply one’s capital. Equity instruments have the potential to generate much higher returns than any other financial instrument. Besides, equities tend to be more liquid than other securities. Higher liquidity is indicative of higher volumes being traded. It means that you can easily sell your holdings in the market at your convenience.

The inherent volatility in the stock market gives traders the opportunity to book short-term profits based on how stock prices fluctuate. But investors can also stay invested for long periods and wait for substantial capital appreciation over time. When investing in stocks or trading them, one must do the due diligence. Those looking for short-term gains should study technical charts and data before taking any positions. Those with long-term goals should examine the company’s fundamentals before buying or selling equities.

Mutual Funds

A mutual fund collects money from a pool of investors to invest in various assets, such as equities, money market instruments, bonds, and other financial instruments. The portfolios are managed by professional fund managers who aim to generate high returns for investors while sticking to the fund’s objectives. As such, mutual funds can be a good option for investors who are either new to the stock markets or lack the time to carry out market research.

Mutual funds can be an excellent way to grow your capital over the long term. You can buy and sell mutual fund units on the stock exchange. Profits are distributed among the unit holders in the proportion of the units held by them. Click here to read about how mutual funds work.

Derivatives

If you have some stock market experience, you could look into derivatives as well. A derivative is a financial instrument that derives its value from an underlying asset or a group of assets. The underlying assets may include stocks, currencies, commodities, market indices, and interest rates, for example. There are two basic types of derivatives instruments: futures and options contracts.

• Futures Contract

A futures contract involves 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 should the buyer decide 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.

These financial instruments have the potential to generate high returns. This is partly because traders often use margin funds as leverage when trading in derivatives. They can also be used to hedge against adverse price movements.

Bonds

Bonds are a type of fixed-income debt instrument. These financial instruments are issued by government entities and private-sector companies that wish to raise capital. You can purchase and sell bonds through the stock exchange.

The advantage of these instruments is that they have a specific interest rate which is mentioned during the issue. When you purchase a bond, you effectively provide a loan to the issuing entity, and they will have to repay the loan in full within the stipulated period.

Things To Keep In Mind While Investing

You now know about the different financial instruments that are traded in the Indian stock market. Here are some thumb rules that you should keep in mind while investing.

1. Never Buy or Sell Stocks Blindly

You may be new to the stock markets, but don’t depend entirely on advice from friends, colleagues, or family members. While you can certainly take note of their suggestions, do your own homework too. Take a look at the company’s fundamentals, study its price charts, and check on related news before investing.

2. Unrealistic Expectations

The stock market can fetch good returns, but only if you invest and trade wisely. It is important to keep your expectations realistic. How can you do that? Begin by setting up a stock market strategy for each stock that you invest in. This will ensure that you book profits in a timely fashion and are able to cut losses when a trade moves against you.

3. Educate Yourself

Know the share market basics before you start investing. This means getting familiar with the market terminology and gathering in-depth knowledge about the company stocks you wish to invest in. When you are familiar with the workings of the company, you will gain a better sense of when to buy and sell its stocks.

4. Avoid Leverage

The golden rule of investing in the stock market is to invest only what you can afford to lose. This means you should always account for the worst-case scenario. Margin funds can give you the leverage to invest much higher amounts. But keep in mind that stock prices could plummet at any time. If you are over-exposed when this happens, you could face massive losses.

5. Diversify Your Portfolio

Don’t put all your money in just one stock or sector. Spread your capital across multiple stocks and sectors to diversify your portfolio. This will minimise your risk and save your capital from getting eroded just because a few stocks did not perform well. A good diversification strategy could help you generate good returns in the long run.

6. Don't Try to Time the Market

Even seasoned traders stay away from trying to time the stock markets. That’s because it is not always possible to pick the exact tops and bottoms of a stock price movement. It is better to adopt a disciplined investment approach and set up a clearly defined financial plan. Analyse the fundamental and technical aspects of the stock to identify suitable price points at which to enter and exit a trade.

7. Control Your Emotions

Greed and fear are said to be the worst enemies of a stock market investor. Sometimes, you might hold on to a stock for longer than is wise simply because you’re hoping for higher profits. Or, you might sell in fear because everybody is panic-selling their shares. Keep these impulses in control and follow your trading strategy closely to generate good returns and keep losses at a minimum.

8. Know Your Risk Appetite

Identify how much risk you can afford to bear before you start investing in the stock market. This will help you to invest in shares according to your risk appetite. For example, conservative investors could focus on large-cap stocks, which are relatively stable in volatile conditions. Meanwhile, investors who can bear some risk could look into small-caps and mid-caps, which can be risky but also have a higher potential for profit.

Process Of Opening Demat Account

To invest in financial instruments that are listed on the stock exchange, you must first open a demat account with a trustworthy broker like Kotak Securities.

Here’s a quick guide to the account-opening process:

• Select a broker or a depository participant and fill in their account-opening form.

• Submit the necessary documents. These include copies of your PAN card, Aadhaar card, identity proof, and address proof, along with passport-sized photographs.

• The broker or depository participant will hand over a copy of the agreement consisting of the terms and conditions.

• A member from the broker or depository participant will visit your home to carry out in-person verification. This is to ensure that the documents submitted during the account-opening process are genuine.

• After successful processing of your account-opening application, you will receive a demat account number, a client ID, and a password. You can use the client ID and password to log in to your demat account from anywhere across the globe. After logging in, you can start transacting in the Indian financial market.

If you are new to stock market investing and wish to open a demat account, look at the account options available and shop around for affordable brokerage plans. Look also for access to multiple trading platforms, research and analysis, and timely customer service. This will bring you all-round support at every level of your investment journey.