Trading Instruments

Trading Instruments: Equities

Equities mean shares in a company and equity investments, also known as stock investments, involve purchasing shares or ownership stakes in a company or corporation. The equity investment entitles the investor to a portion of the company’s profits and assets, as well as voting rights in certain cases.

Equity shares provide long-term capital to a company and investors can only reclaim their capital during the company’s liquidation. These shares can also grant voting rights to the investors to participate in company meetings. By investing in equity shares, investors are entitled to a share of the company’s income and also gain an ownership claim on the company’s assets.

Investing in equities can offer the potential for higher returns, allowing you to benefit from the company’s success through capital appreciation and dividends. However, there are risks involved.

How to Invest in Equities?

  • Individual stocks
  • Exchange-Traded Funds (ETFs)
  • Mutual Funds

Types of Equity Investment

  • Shares
  • Equity Mutual Fund Investments
  • Equity Futures
  • Equity Options

Risks Associated with Equity Investments

As an investor, you need to be well aware of the risks associated with equity investments and that they are subject to market fluctuations and volatility. Also, investing in individual stocks also carries the risk of company-specific events impacting stock prices. The broader economic, political, or financial system events can affect equity markets.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.

Trading Instruments: Introduction to Derivatives

Derivatives are financial contracts based on stocks, bonds, commodities, currencies, or indices. They allow price speculation, risk management, and portfolio diversification. This summary discusses derivatives, their types, participants, trading methods, pros, and cons.

Market conditions affect the value of derivatives, which depend on an underlying asset. They help traders profit by predicting price movements or hedging losses. If your stock drops, a derivative contract can offset the loss by correctly predicting price changes. These two functions make derivatives useful for speculation and risk management.

Types of Derivatives

  1. Forwards:
  • Customised contracts to buy or sell an asset at a specific price at a later date.
  • Trading OTC, not on exchanges.
  • No central regulation, counterparty risk.
  1. Futures:
  • Standardised contracts traded on stock exchanges, obligating both parties to fulfil the terms.
  1. Options:
  • Give buyers the right but not the obligation to buy or sell an asset at a set price.
  • Upon exercise, sellers (option writers) must execute the contract.
  1. Swaps:
  • Private agreements to exchange cash flows, often used for currency or interest rate swaps.
  • Traded OTC without central regulation.

Key Participants in the Derivatives Market

  1. To hedge asset price fluctuations, use derivatives.
  2. Speculators: Profit from market movements without owning the asset by trading derivatives.
  3. Arbitrageurs profit from price differences across markets, ensuring market efficiency.
  4. Leverage lets margin traders control larger positions.

How to Trade Derivatives

To trade derivatives effectively:

  1. Know the Market: Understand derivatives, market dynamics, and price influences.
  2. Open a Trading Account: Choose a trustworthy broker like Angel One and open an account.
  3. Keep Margin Reqs: Have enough money for market fluctuations and margin calls.

Advantages of Derivatives

  • Risk Hedging: Protect investments from market fluctuations.
  • Derivatives are cheaper to trade than other financial instruments.

Disadvantages of Derivatives

  • Risky: Their value fluctuates with underlying assets.
  • Their volatility can cause big losses for novice traders.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.

Trading Instruments: Commodity Trading

The commodity market is a key alternative to traditional financial markets, enabling you to trade physical goods like metals, energy products, agricultural items, and livestock. This market allows portfolio diversification, helping mitigate risks from inflation and price volatility.

How Does It Work?

The commodity market operates through contracts:

  • Futures Contracts: Legally binding agreements to buy or sell commodities at a future date and price. These contracts profit based on price fluctuations.
  • Options Contracts: Provide the right, not the obligation, to buy or sell commodities, reducing risk while allowing profits from market shifts.

For example, if gold futures rise from ₹72,000 to ₹73,000 per 100 gm, the profit is credited to your account.

Types of Traders

  • Speculators: Trade based on price predictions to earn profits.
  • Hedgers: Use contracts to offset risks in physical markets.

Factors Influencing Prices

  • Demand and Supply: Scarcity or surplus significantly impacts prices.
  • Global Events: Geopolitical issues like oil production cuts affect prices.
  • Production Costs: Higher costs push prices up.
  • Speculation: Investor activity influences market dynamics.

Benefits and Limitations

  • Benefits: Diversifies portfolios, reduces risk, supports agriculture, and offers price predictability.
  • Limitations: High leverage increases risk, and volatility disrupts strategies.

Conclusion

Commodity trading is ideal for combating inflation and diversifying investments. However, it demands regular monitoring and strategic planning due to its volatile nature.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.

Trading Instruments: Forex Trading

Forex trading, or foreign exchange trading, is the buying and selling of currencies, such as exchanging Indian Rupees (INR) for US Dollars (USD). This market facilitates global trade, with participants ranging from governments to individual investors. Forex trading operates continuously across the world, enabling transactions 24/5.

Key Factors Influencing Exchange Rates

Exchange rates are either “free-floating,” based on demand and supply, or “fixed-floating,” controlled by governments or central banks. Factors like interest rates, trade balances, credit ratings, and political stability affect currency values.

How Forex Trading Works

Forex involves trading currency pairs (e.g., USD/INR). Profit is made by predicting whether one currency will strengthen or weaken against another. Retail traders, institutional investors, corporations, and banks are major market participants.

Types of Forex Markets

The forex market is categorised into spot (immediate trades), forward (future contracts), futures (standardised contracts on exchanges), and options (rights to trade without obligation).

Strategies for Profit

Traders adopt strategies such as long trades (betting on appreciation) or short trades (betting on depreciation). Techniques range from short-term scalp trades to long-term position trading.

Forex Trading in India

Forex trading in India is regulated by SEBI and RBI. Trades are limited to INR pairs with USD, EUR, GBP, and JPY on exchanges like NSE and BSE.

Pros and Cons

While forex offers high liquidity, leverage, and a 24-hour market, it comes with risks like limited regulation and high volatility. A trusted broker is essential to navigate this dynamic market effectively.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.

Trading Instruments: Bonds and ETFs

Bonds help companies and governments raise money for infrastructure, expansion, and other needs. You lend money to the issuer in exchange for interest payments (coupons) and the return of your principal at maturity when you buy bonds. Bonds are safer investments than stocks because they offer a credit stake rather than company ownership.

How Bonds Work

Bonds are investor loans to issuers. Governments and corporations pay interest and return principal at maturity. Creditworthiness, term length, and interest rates affect the bond’s market price, but the coupon rate and face value are fixed.

Key Bond Elements

  • Corporations or governments raise funds.
  • Fixed bond price at issuance.
  • Coupon: Face-value-based interest paid semi-annually.
  • Repayment of principal comes at maturity.
  • Secondary market bond price fluctuation.
  • Credit Quality: Issuer creditworthiness rating.
  • YTM: Total return on a bond held to maturity.

Types of Bonds in India

  1. Government Securities: Safest, backed by the government.
  2. Sovereign Gold Bonds: Linked to gold prices, issued by RBI.
  3. Corporate Bonds: Higher returns but involve credit risk.
  4. Convertible Bonds: Convertible into company stock.
  5. Capital Gains Bonds: Offer tax exemptions on reinvested gains.

Classifications by Returns

  • Fixed-interest bonds: Provide steady returns.
  • Rates on floating-interest bonds vary by market.
  • ILT bonds protect against inflation but yield less.

Bond Valuation and Yield to Maturity

Bond valuation determines its fair value by calculating cash flows and yield to maturity (YTM). YTM accounts for returns, factoring in market price deviations from the face value.

Investment Considerations

Consider the pros and cons before investing: low risk, stable returns, diversification, low liquidity, inflation risk, lower returns than stocks. Assess credit ratings (AAA for reliability) and match investments to goals. Diversifying bonds by maturity is wise.

Conclusion

For portfolio diversification, bonds provide steady returns with low risk. Choose a trustworthy broker for smooth transactions, expert advice, and tech-driven investment platforms.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.