Investment is an offer of fund by a person, who has surplus, to the person who wants it either to boost productive activities or diversify existing business. So, investing in equities and bonds are means of investment to increase value of original surplus.
Understanding financial markets and financial instruments
Financial markets are the arrangement in which investors and buyers invest and borrow funds for lucrative return and business expansion.
Funds are either borrowed for short or long term depending on the types of financial markets and instruments. Basically, investors have to choose whether he wants interest or dividends.
If an investor plans to pool surplus funds in bonds and debentures, he is aspiring to expect better interests as he becomes debitor to the borrowed firm.
On the other hand, if an investor goes to purchase equity securities aiming to take ownership and dividend in return, he becomes the owner of the given company as he holds equity.
In this manner, any investor can increase the value of his surplus either by investing in equities and bonds to be owner or deditor to the given company or corporation.
Overview of money markets and capital markets
Financial markets are classified as money markets and capital markets for the convenience of investors and borrower in the form of broad categories of financial instruments.
Further, money markets are the arrangement by which short term funds are made available for the aspiring companies, Understandably, the purpose of money markets is to ward off the short term liquidity crunch in the market arisen due to mismatch of demand and supply.
Second part of financial markets is capital markets which is classified as securities and non securities markets.
Securities markets further classified as primary and secondary securities markets on the basis of whether the securities are newly issued or already issued.
Difference between Equity securities and debt securities
In the financial markets, securities are financial instruments or certificates denoting either company ownership or debit owner or debitor. Simply put, securities have monetary value and can be traded in the financial markets.
On the basis of return and liabilities, securities are categorised as equity securities and debt securities.
Equity securities
Equity securities include stock of the company or equities. In other words, person who purchases equity securities, becomes owner of the company depending on the percentage he purchase.
Debt securities
Whereas, debt securities involve liabilities on the actor who sell in the market. And, person who becomes debitor by purchasing the debt securities of given company. Bonds, debentures are instruments of debt securities.
Clearly, person who has equity securities entitled to receive dividend and ownership in return for his invested amount. While person who has debt securities entitled to receive fixed interest in return for his invested amount or fund.
Explaining the types of equities and bonds
Therefore, there are different pros and cons for investing in equities and bonds financial instruments. Here, let’s see the procedure of investing in equities and bonds, and potential pros and cons of both.
So far, I have clarified about the meaning, types and structure of financial markets its instruments and nature. Hereafter, first of all, i will provide you a detailed analysis of types and examples of equities and bonds you aim to invest.
Next, I will provide the procedure of investing in equities and bonds. It means that the methods and procedures by which you can go for investing at your own risks.
Then, you will get a clear-cut understanding regarding risks and rewards associated in investing in equities and bonds. And, finally, I’m going to explain the possible alternatives for investing in equities and bonds with minimum risk and better rewards or returns.
Understanding types of equities and associated risks and rewards ratio
Generally, you might have listened the gossips around regarding stocks, shares, and equities of companies. Stock of company means totality of shares of company divided in. If you purchase shares, you purchase equity of that given company.
Actually, if a person purchases equity of any company, he or she becomes owner of that company in the same degree of the shares or equities he purchased.
On the basis of growth history, valuation, dividends, and reliability, stocks are classified as bluechip company stocks, value stocks, growth stocks, and high dividend generating stocks.
1.Bluechip stocks, 2.Value stocks 3.Growth stocks, 4.High dividend stocks
1.Bluechip companies and stocks
Large cap, well reputed, financial sound, strong growth history stocks having global recognition and publically traded stocks we recognise bluechip stocks.
In India, Tata consultancy services, Infosys, reliance, maruti suzuki are main bluechip stocks. In US, Apple, Amazon, Tesla, are regarded well known bluechip stocks.
Comparatively, though bluechip stocks are the most reliable to invest, these are not so profitable in comparison with growth stocks as they follow the avarage growth of market.
Those investors who have less risk appetite can opt for these stocks as long term investment means. However, these are not free from market risks as they fluctuate according to the affecting factors in space and time.
2.What are the Growth stocks?
Newly listed, small cap, aggressive growth potential, stocks are termed as growth stocks. Investors having more risk appetite can opt for these growth stocks. Because, these stocks could fluctuate wildly in either of directions. Hence, these are more risky in nature.
2.Value stocks or discounted stocks
Most of the time, stock market analysts advise clients to purchase stocks having better validation. Valuation means stocks are traded much lower than what the actual cost should be. In such selection, one can hope better income in course of time.
But, the lower price may be due to host of reasons and may invite sudden negative movements as well. As we know that investors invest money by betting future prospects. Therefore, mere better valuation can’t be a sufficient condition for investing.
4.High dividend stocks
Initially, I clarified that investing in equities bear dividend for owners rather than fixed income. So, the growth in stocks is the income for investos.
Usually, investors bet on high income sector or selective stocks having high income potential. But, history reminds us that no sector is reliable in space and time. So, it is wrong to expect high income on the basis of past growth history.
These are the major types of equities or company stocks one can opt for investment depending on theirs risk appetite. Now, in the process of exploring means and ways in investing in equities and bonds, I’m going to explain the types of bonds and examples.
Explanation of types and examples of bonds
Bond is one of the instruments of financial assets in securities markets. If you buy or invest in bonds, you are giving money as loan to the seller of the bonds. In return, the buyer receives fixed interest payments at a fixed time interval.
In the process of exploring means in investing in equities and bonds, I’m going to provide detailed information regarding bonds and pros and cons.
1.Government bonds
2.Corporate bonds
3.Municipal bonds:
1.Government bonds
Unlike corporate bonds, government bonds are backed by respective governments to borrow funds for development activities. If these are backed by government, it is a low risk investment but with lower return.
Such bonds are also known as government securities. Here, the interests paid on such investment depends on the tenure. More the tenure, higher the return and vice-versa.
2.Corporate bonds
Either to boost productive activities or diversify existing business, corporates require money. Apart from issuing stock of shares, they opt to borrow funds from open market.
Corporate pays fixed interest payments or lumpsum amount on maturity of bonds. Even they could prefer to pay earlier than the maturity period.
In terms of corporate bonds, if the bond has lower risks, yields lower return than that of involving higher risks.
3.Municipal bonds
Comparatively lower return bonds but having risk free return. These types of bonds are issued by states, countries or local governing agencies like municipal corporations to borrow funds for development activities.
Understanding process and procedure for purchasing equities and bonds
Once you know the proper understanding regarding the nature of financial instruments like equities and bonds you aim to invest, next, you need a demat account.
Demat account or Dematerialized account is a facility by which one can hold financial securities like money in saving account.
Demat or Dematerialized account
Nowadays, in the market or open economies, political borders have hardly barriers. Any one by the means of electronic platforms, can buy and hold financial securities in the electronic format in demat account.
There are thousands of Broking platforms offer such facility across the world. Broking platforms charge certain amount of fee for offering such facility.
If one wants to open demat account, he or she has to submit necessary documents like pan card, address proof, identity proof and bank statement.
Trading and demat account
Actually, there are two types of accounts. One is trading account, and other is demat account. Trading account is useful for trading in forex, commodity and derivatives. While demat account provides facility to hold financial securities in the electronic format and could be sold out as per the situation.
Final thought on investing in equities and bonds,
So far, I have provided detailed information regarding financial securities like equities and bonds. In the process, I have explained about the financial markets, securities markets and types of equities securities and debt securities.
Also, I have discussed the risk and rewards regarding different stocks and bonds. Eventually, I have provided the process and procedure in investing in equities and bonds, as well as other financial instruments.
At last, I would like to make clear that no matter in which financial securities you are interested, nothing is free from risks. More you go for reward, higher you face the risk factors. Therefore, while investing in equities and bonds, please keep in mind that it is not shortcut to be rich in overnight.
Short summary on investing in equities and bonds,
Primary and secondary securities
Initial public offering or IPO