Investors can choose from traditional securities like stocks and bonds, or more sophisticated instruments like futures and options contracts. Stocks offer equity ownership and voting rights, while preferred shares offer consistent dividends. Bonds pay interest and are issued by governments, municipalities, or corporations. Derivatives like options and futures allow investors to buy or sell financial securities at a later date.
In the realm of investment, there are multiple capital market instruments from which investors can choose. Traditional securities can be used in the equity and debt capital markets, although there are also some more sophisticated market instruments that are traded in the alternative segment. Equity securities are mostly stocks, including common and preferred stocks, while bonds are the instruments that comprise the debt capital markets. Nontraditional investments include futures and options contracts, which are financial securities that derive their value from another asset, such as stocks or bonds.
Stocks are capital market instruments that are generally widely traded by investors. By purchasing equity shares, investors gain a stake in a publicly traded company. The greater the number of shares owned, the greater the equity ownership. Depending on the size of an allocation or investment, an investor who owns equity shares can cast a vote on major company events, such as a merger or acquisition. Voting shares are generally reserved for common stakeholders, which are investors who purchase the most available type of equity shares.
Preferred shares are another type of capital market instrument. These financial securities generally offer consistent dividends to investors. The market value, or price, of the preferred stock of shares does not tend to fluctuate dramatically. Investors often rely on dividend income, which is earned from a company’s earnings, to make a profit. Common shareholders can also earn dividend distributions, but preferred shareholders generally have priority over these payments.
Debt securities are another type of capital market instrument called bonds; These can be issued by a government, municipality or corporation. The issuer borrows money from investors and, in return, pays interest to lenders over the life of the financial security contract. Investors are also reimbursed for the face value of the bond after the contract expires. Bonds are generally issued for a period of months or years, and interest rates often depend on the state of the economy and the creditworthiness of the issuer.
Derivatives, like options and futures, represent a kind of capital market instrument. Options are contracts that give an investor or trader the opportunity to buy or sell a financial security, such as a stock or bond, at a later date at a price set in advance. Futures contracts are similarly based on an action that will take place at a later time. Investors and traders must either honor a futures contract and take delivery of an underlying item, which could be a commodity like sugar, for example, or settle a contract for cash.
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