Investment Tools in the Stock and Money Markets
The financial market is essentially a platform where the supply of capital meets its demand. What is traded within these markets includes financial instruments such as stocks, bonds, and others. Financial markets play a crucial role in facilitating transactions between sellers and buyers of securities in established locations called stock exchanges. However, with advancements in technology, securities trading can also be conducted online.
Financial markets can be categorized into two main types:
- Capital Market
- Money Market. Below are the primary investment tools traded in both markets.
Investment Tools in the Stock Market
Stocks
Stocks represent ownership shares in a corporation. The company’s capital is divided into equal parts, with each share representing a portion of ownership verified by a certificate. A stock serves as a right for the shareholder, who is the holder of the stock certificate.
It is important to note that stocks have various values, including par value, issue value, book value, intrinsic value, and market value. The main types of stocks include:
- Types of stocks based on the nature of the shareholder’s contribution
- Cash Stocks: awarded to shareholders who contribute their stake in cash.
- Asset Stocks: awarded to shareholders who contribute their stake in kind, such as land or buildings.
- Types of stocks based on their form
- Registered Stocks: registered in the owner’s name and indicated on the stock certificate.
- Bearer Stocks: do not specify the owner’s name, indicating that ownership is held by whoever possesses the certificate.
- Types of stocks based on shareholder rights
- Common Stocks.
- Preferred Stocks.
Bonds
Bonds are financial instruments issued by corporations and governments when they seek to borrow substantial amounts of money and cannot obtain it from a single individual or institution. They break down the loan into smaller, equal parts, issuing a certificate for each with a par value corresponding to that portion. The total nominal value of these certificates equals the amount they wish to borrow.
The government and corporate bond issuers are obligated to repay the bond’s value on its maturity date, with the bondholder entitled to interest, typically expressed as a percentage of the bond’s nominal value. It is not contingent on the success or profitability of the projects funded by the bond; the issuer remains bound to repay the amount regardless of the outcome.
Investment Tools in the Money Market
Treasury Bills
Treasury bills are generally issued by central banks, and they can be purchased by individuals through licensed banks at a selling price typically higher than the buying price. The difference between these prices represents the profit margin gained by the dealers of these bills.
Commercial Papers
Commercial papers are investment instruments most often taking the form of promissory notes issued by financially sound institutions. They are considered one of the oldest short-term investment tools in the secondary money market.
Negotiable Certificates of Deposit
These are debt instruments entitling the holder to a specific amount of a time deposit made at a bank. Banks issue these certificates at various nominal values, typically for periods of less than one year based on the value of the deposit.
Bills of Exchange
Bills of exchange are debt instruments issued by commercial banks, representing bank drafts used by local importers wishing to import foreign goods on credit.