What Tradable Instruments Do Stock Markets Offer?

Stock markets by their very nature bring buyers and sellers together to exchange company securities and a variety of underlying instruments. Because of the extent of global trading activity and the sheer volumes traded every single day, stock markets have had to be responsive to the needs of traders in developing new and innovative instruments which can be used as part of a diverse trading portfolio. But aside from straightforward shares, what else is traded on stock markets, and how can these additional instruments be used to build a more profitable portfolio?

In addition to shares, publicly traded companies are also permitted to sell debentures, instruments which are designed as a means of raising loan finance from the markets (in contrast to equity finance). Debentures, also known as bonds, yield a specified rate of interest payable on a set maturity date, making them a more secure instrument than shares, with a guarantee that the debenture will be paid in full plus interest at the face-value date - provided, of course, that the company doesn't go out of business in the interim. Debentures can also be traded, although they are naturally much less price volatile given the set timeframe and rate of return they offer.

Debentures:

Company X issues 10% debentures which mature in 10 years from the issue date. A trader invests £1000.00 in Company X 10 year debentures, which are repaid in ten years time at a rate of £1100.00 - i.e. the capital amount plus interest.

As Company X, this allows the long term raising of finance, while for the trader, this presents a low-risk investment with an identifiable yield and maturity date.

As a wider classification of instrument, stock markets now offer derivatives linked to underlying assets. Derivatives are intangible instruments in their own right which bring the primary advantage of leverage - rather than trading in the underlying asset, traders are buying rights associated with assets, such as options or futures, which allow small fluctuations in the underlying price to have an amplified impact on the price movements of the instrument, and are often used as a hedge against unexpected price movements by professional traders.

Like shares, these derivative instruments can be traded in their own right, and as such often have a lower barrier to entry for traders in terms of price.

Derivatives:

• Options: effectively the right to buy an underlying asset at a specific price at some future point, which may or may not be exercised by the trader depending on the movement in price.
• Futures: a contract to buy a given asset at a specified price on a specified future date.
• Interest Rate Derivatives: specific contracts that relate to amounts of interest on a given amount of money, rather than a tangible asset.