When exploring Types of Stocks, Securities, and Investment Instruments, understanding related terms can be invaluable.
From equities and bonds to mutual funds and derivatives, each investment instrument has unique characteristics and risks.
Know the essential terms that will be helpful for you to make informed investment decisions with greater confidence.
Common stock represents partial ownership in a company, entitling shareholders to vote on corporate matters and receive dividends when profits are distributed.
However, common stockholders are last in line for asset claims if a company faces liquidation.
For example, purchasing shares of companies like Tata Consultancy Services (TCS) or Reliance Industries in India means buying common stock, allowing investors to benefit from the company’s growth over time.
Preferred stock is a type of equity that provides priority for dividends and claims on assets over common stockholders.
Preferred shareholders often receive fixed dividends, which makes these shares appealing for income-focused investors. However, they typically lack voting rights.
For instance, a company might issue preferred shares with a guaranteed 6% annual dividend, offering stability for investors who prefer consistent income over the potential price gains of common stock.
Blue-chip stocks refer to shares of large, financially stable, and reputable companies with a long history of performance, making them generally reliable investments.
These companies tend to be market leaders, such as Infosys, HDFC Bank, and Hindustan Unilever in India, and offer lower volatility with the potential for steady returns, making them popular for long-term investors.
Penny stocks are low-priced, highly speculative shares of small or emerging companies, often trading for less than ₹10 in India or under $5 in the U.S.
Due to their lower price and small market cap, they come with high volatility and risk but offer potential high returns.
For example, a small biotech company’s stock may trade at a very low price, attracting investors willing to take a risk for potential gains if the company succeeds.
Bonds are debt securities issued by governments, corporations, or other entities to raise capital.
When you buy a bond, you essentially lend money to the issuer, who promises to pay regular interest and repay the principal at maturity.
Bonds are generally less volatile than stocks and provide fixed income, making them attractive to conservative investors.
For example, the Indian government issues sovereign bonds, while companies may issue corporate bonds for specific projects.
A mutual fund pools money from multiple investors to invest in a diversified portfolio of assets, including stocks, bonds, or other securities.
Managed by professionals, mutual funds allow individual investors to access diversified portfolios with lower individual risk.
Examples include SBI Bluechip Fund, which invests in large-cap Indian companies, and ICICI Prudential Liquid Fund, which focuses on short-term, low-risk investments.
An ETF is a fund that holds a collection of securities and trades on an exchange like a stock.
It offers the diversification of mutual funds and the flexibility of stock trading, as ETFs can be bought or sold throughout the trading day.
For instance, the Nifty 50 ETF in India tracks the performance of the Nifty 50 Index, allowing investors to gain exposure to the index without buying each individual stock.
An index fund is a type of mutual fund or ETF that replicates the performance of a specific market index, such as the Nifty 50 in India or the S&P 500 in the U.S. It offers broad market exposure with lower fees, as it’s passively managed.
An investor might choose an index fund that tracks the Sensex, aiming for returns aligned with the broader market’s performance.
Debentures are unsecured bonds issued by companies to raise funds. Unlike secured bonds, debentures rely on the issuer’s creditworthiness rather than collateral. This makes them riskier, but they often offer higher interest rates.
For example, a company may issue debentures to finance expansion, offering investors regular interest payments in return for the loan.
Commodities are basic goods or raw materials like oil, gold, agricultural products, and metals.
Commodities are often traded on exchanges, and investors may invest directly or through futures contracts. MCX (Multi Commodity Exchange) is the commodity exchange in India.
For example, buying gold futures allows investors to speculate on gold price changes, or they may invest in a commodity ETF to gain exposure to multiple commodities.
Derivatives are financial contracts that derive their value from an underlying asset, such as a stock, bond, or commodity.
Derivatives are often used for hedging or speculating on asset prices.
For instance, an investor might purchase a stock option (a type of derivative) to profit from potential stock price movements without directly owning the stock.
Futures are standardized contracts obligating the buyer to purchase or the seller to sell an asset at a predetermined price on a specific date.
They’re used to hedge against price fluctuations or to speculate.
For example, a farmer might sell corn futures to lock in a selling price and protect against price drops, while an investor might buy them to benefit if prices rise.
Options are contracts that give the holder the right, but not the obligation, to buy (call option) or sell (put option) an asset at a set price within a specified period. They are popular for hedging or speculating.
For instance, an investor might buy a call option on a stock they expect to rise, paying a premium for the potential to profit from future price increases.
A REIT is a company that owns, manages, or finances income-generating real estate.
REITs offer investors a way to invest in real estate without buying property.
For example, Embassy REIT in India owns commercial real estate, providing investors with income through dividends linked to rental revenues.
A hedge fund is a private investment fund that uses diverse strategies, such as leverage, derivatives, and short-selling, to seek high returns.
Hedge funds typically require large minimum investments and are available only to accredited investors.
For example, hedge funds may invest in a mix of assets globally, aiming for gains through riskier strategies than traditional funds.
A unit trust pools funds from investors to invest in a portfolio of stocks, bonds, or other assets.
Managed by professionals, unit trusts offer diversification with each investor holding units that represent their share in the portfolio.
For instance, an Indian unit trust may invest in various sectors like banking and IT, offering investors broad exposure.
Corporate bonds are issued by companies to fund business activities, like expansion or acquisitions.
They generally offer higher yields than government bonds but come with increased risk.
For example, a large corporation may issue bonds at a fixed interest rate to finance a new project, providing regular interest to bondholders.
Government bonds are debt securities issued by a country’s government to fund public expenditures.
They are usually considered low-risk since they’re backed by the government.
For instance, India issues government bonds to finance infrastructure projects, offering stable returns to investors.
Treasury bills are short-term debt instruments issued by the government, maturing in one year or less.
They are sold at a discount and redeemed at face value, offering safe returns for conservative investors.
For example, an investor might buy a 6-month T-bill from the government, earning a small, predictable profit when it matures.
Cryptocurrency is a digital or virtual currency that uses cryptography for security, making it nearly impossible to counterfeit or double-spend.
Unlike traditional currencies, cryptocurrencies operate on decentralized networks based on blockchain technology, which allows them to exist outside of central authority or government control.
Examples include Bitcoin, which was the first cryptocurrency, and Ethereum, which introduced smart contracts and has applications beyond currency.
Cryptocurrencies are often used for digital transactions, and in recent years, they have also gained popularity as investment assets.
Blockchain is the underlying technology behind cryptocurrencies and is essentially a decentralized ledger that records transactions across multiple computers, making it secure and transparent.
Each transaction forms a “block” linked to the previous one, creating a “chain.” Since this data is stored across multiple nodes (computers), it is highly secure and resistant to tampering.
Blockchain technology has uses beyond cryptocurrencies, such as in supply chain management, where it helps track goods from production to delivery, ensuring transparency and authenticity.
For instance, IBM’s Food Trust blockchain allows companies to track food from farm to table, enhancing food safety.
Private equity refers to investment capital from high-net-worth individuals or firms that is used to acquire stakes in private companies, often with the goal of improving their operations and increasing their value over time.
These investments are generally illiquid, as they are not traded on public exchanges, and involve a longer investment horizon.
Private equity firms like Blackstone or KKR acquire companies, restructure them to enhance their profitability, and eventually sell them for a profit, either through a direct sale or a public offering.
A common example of private equity investment would be the acquisition of a family-owned business to scale and modernize its operations.
Venture capital (VC) is a type of private equity focused specifically on funding startups and small businesses with high growth potential.
Venture capitalists provide capital in exchange for equity in the company and typically play an active role in guiding its growth.
VC funding is often provided in rounds (seed, Series A, Series B, etc.) as the company meets milestones. For instance, companies like Byju’s and Flipkart received significant venture capital funding during their early growth phases in India. Venture capital is high-risk but can yield high returns if the startups achieve significant growth or go public.