Different Securities Across the Stock Market
“Know what you own, and know why you own it.”
The stock market has been the darling of investors for over a century thanks to the lucrative returns it offers! But great returns involve equally great risks. Investing your money on specific securities just because it is talk of the Wall Street or in the news has its appeal but is not always wise. It is vital to understand the nitty-gritty of the market before you start investing.
The capital market is the backbone of any economy as it helps direct the capital in the form of equity and debt towards the idea, innovation or business. It acts as a bridge between the one who seeks returns and profits and the ones who need funds for the expansion of their business.
For instance, in the US, around 73% of the funding for the economic activities of non-financial corporations is done through capital markets: debt and equity. The companies find it easier to raise funds as debt from capital markets rather than other corporations and banks. Hence, 80% of the debt in the US is raised through the capital market, with a mere 20% from banks.
In the debt market, investors and traders deal in debt instruments. On the contrary, in the equity or stock market, investors and traders buy and sell the company’s stakes, known as shares or stocks.
Global Equity Market
Thanks to the massive jump from the millennial market base and surge in innovative investment platforms, the global equity market continues to rise. The global total market capitalization as of 31st December 2019 was approximately USD 93.686 trillion (World Bank, 2021). This humongous amount is more than the GDP of the top five world economies combined!
Until the second quarter of 2021, the trading value in the stock market was USD 37.7 trillion. The US dominates the global stock market with its share of around 56%, followed by Japan and China with 7.4% and 5.4%, respectively.
While these numbers are fascinating, investment in the stock market is said to be riskier than bonds. But, with that said, investment in stocks also brings much higher returns.
According to Goldman Sachs, a global investment bank, there is a 90% likelihood of stock outperforming bonds through 2030. So, when one has decided to invest in the stock market, it is important to understand different securities present across the stock market.
Investing In Different Securities in the Stock Market
An old idiom says we should not keep all the eggs in one basket. The same is true when it comes to investing. Investing in one stock or one security type makes traders and investors vulnerable to risk. On the other hand, investing in different securities helps them diversify their risk.
The market has a wide range of alternatives with required negotiable and interchangeable features with a diverse range of securities.
Globally, there are 16 major stock exchanges. Out of these, the New York stock exchange is the largest. The New York stock exchange has a market capitalization of $26.6 trillion. Other than this, the three stock exchanges are NASDAQ, Euronext, and the Shanghai Stock exchange.
Debt securities and equity securities are both offered by companies. However, they vary based on the mode and terms of repayment. Where debt securities offer fixed payments, the equity shareholders aren’t entitled to regular payments. Instead, they have the option to earn profits through capital gains. These capital gains come by making stock sales in the exchange market. Ownership is one of the most critical aspects of equity securities.
Exchange-Traded Funds (ETFs)
When it comes to Exchange Traded Funds, they can be referred to as an investment fund with underlying assets like foreign currency, bonds, commodities, and stocks. ETFs are traded just like a stock, and their prices undergo various fluctuations throughout the day. They also track indexes like the S&P 500, Nasdaq and the Dow Jones, along with the Russell 2000. The investors of this fund don’t have direct ownership of the underlying asset. However, they have indirect ownership of the profits of those assets. ETFs are available for sale in the secondary market as well.
Futures are a type of derivative contract requiring parties to exchange an asset at a specific price and date in the future. The buyer is supposed to purchase, and the seller must sell the said asset at the determined price no matter what is the cost of the asset in the market at the set date.
The assets often used to create futures contracts include financial instruments or physical commodities. The futures contracts comprehend the details of the quantity of the asset. They are also standardized to enable trading on the futures exchange. They are also used for trade speculations and hedging.
Currency-based trading is popularly known as foreign exchange or Forex. It is the buying and selling ability of currencies within the Forex market to gain certain profits. They can also be called the speculative trading of foreign exchange. Foreign exchange trading is one of the biggest markets across the world with $2 trillion being traded daily. Moreover, it has a rapid projection of growth. The most critical factor creating a differentiation between currency trading and several other types of trades is the aspect of liquidity. Currency trading has extensive levels of liquidity. Apart from foreign exchange, cryptocurrency is a new term that can be included in currency-based trading. It is digital currency trades that take place on crypto exchanges.
A cryptocurrency is a virtual, digital currency. It is based on a decentralized network of nodes using blockchain technology, a distributed ledger. Distribution over many nodes makes it fundamentally different from a centralized solution such as a stock exchange or a bank, where a centralized authority is fundamental to the transaction. That makes it appealing for various uses, including criminal activities. Cryptocurrencies are more suitable for speculation than long-term savings because of their strong price volatility.
Another leading trading market is the bonds market. It allows the investors to attain virtually infinite investment options. Known as the medium to earn interest while protecting capital, bonds have evolved into a $100 trillion global marketplace. They offer exceptional benefits, including superior returns. Basically, bonds are like loans taken by the issuer of the bond from the bond purchaser.
Commodities can be referred to as one of the most critical trading methods in the global market. They are essential raw goods used in commerce. Some primary examples of commodities are gold, grains, oil and natural gas. For investors, commodities are significant to add diversification to the investment portfolio. It happens as the commodity prices tend to move in the opposite direction compared to stocks. Moreover, some investors also depend on commodities within the duration of market volatility.
Securities in the global financial market are quite diverse. As people are gaining financial independence, more investments are directed towards such securities. If you are willing to make your way to the global money market, understand these securities and further devise strategies as per your goals to make smart choices in the investment and trade world!