2.5 : Capital Market Instruments

Capital market instruments, such as stocks, bonds, debentures, and derivatives, empower individuals and organizations to generate and invest long-term funds. Understanding these tools can help you navigate the complexities of finance effectively. For example, stocks represent ownership in a company and provide shareholders with a claim to part of the company's earnings and assets.

On the other hand, bonds are debt securities in which the investor lends money to an entity that borrows the funds for a defined period at a fixed interest rate. Debentures, similar to bonds but typically unsecured and dependent on the issuer's creditworthiness, offer another avenue for investment.

Derivatives are financial contracts whose value is derived from the performance of underlying assets, rates, or indices. They can reduce the risk of adverse price movements in an asset or bet on the direction of price movements.

Mutual funds pool money from many investors to invest in a diversified portfolio of stocks, bonds, or other securities, allowing investors to diversify their holdings with less capital.

Efficient capital markets contribute significantly to a country's economic development by matching those needing capital with those with capital to invest.