What Is Traded On The Share Market?
A share is a unit denoting equity ownership in a corporation that exists as a financial asset providing equitable distribution for any profits earned. Hence, when you buy shares, you buy a stake in the company whose shares you have bought. This means that if the company becomes profitable over time, shareholders are rewarded with dividends. Traders often choose to sell shares at a price higher than which they purchased them.
A company requires money so they can undertake projects. They pay their investors dividends from the revenue earned on their projects. One way of raising the capital for operations and other company procedures is via bonds. When a company chooses to borrow money from a bank, they take a loan which they repay through periodic interest payments. On a similar note, when a company opts to borrow funds from a variety of investors, this is known as a bond, which is also paid off through timely interest payments. Take the following example as an explanation of how bonds work.
Imagine that your goal is to start a project that will begin to earn money in two years’ time. To undertake this project, you will require some initial amount to get you started. Suppose you acquire the required funds in the form of a loan from a friend and write down the receipt of the loan stating that you owe them ₹1 lakh which you will repay in five years with an interest rate of 5% per annum. Suppose that your friend now holds this receipt. It means that they have just purchased a bond by lending out money to your company. Since you have promised to pay the principal amount at a 5% interest, you do so and finally extinguish your principal repayment by the time the fifth year comes to a close.
3. Mutual Funds
One key financial instrument part of share market basics is mutual funds investing. Mutual funds are investments that allow you to indirectly invest in the share market. You can find mutual funds for a variety of financial instruments like equity, debt, or hybrid funds, to name a few. Mutual funds work by pooling money from all the investors that fund them. This aggregate amount is then invested in financial instruments. Mutual funds are handled professionally by a fund manager.
Each mutual fund scheme issues units that are of a certain value similar to a share. When you invest in such funds, you become a unit-holder in that mutual fund scheme. When instruments that are part of that mutual fund scheme earn revenue over time, the unit-holder receives that revenue reflected as the net asset value of the fund or in the form of dividend payouts.
The market value of shares listed on a stock market continues to fluctuate. It is difficult to fix the value of a share at one particular price. This is where derivatives enter the picture. Derivatives are instruments that allow you to trade at a price that has been fixed by you today. To put it simply, you enter into an agreement where you choose to either sell or buy a share or any other instrument at a certain fixed price.