1.) Derivative Securities:
Derivative securities are financial contracts whose value is derived from the value of an underlying asset, such as stocks, bonds, commodities, interest rates, or currencies.
- These instruments are mainly used for hedging risk or speculating on price movements.
Key Features:
- Derive value from an underlying asset
- Traded on exchanges or over-the-counter (OTC)
- Used to manage financial risk or for profit through speculation
- Often involve leverage (small capital controlling large value)
Common Types of Derivatives:
- Options
- Futures Contracts
- Options Contracts
- Swaps
- Forwards
Functions of Derivatives:
- Risk Management (Hedging): Protect against price volatility
- Price Discovery: Help determine future prices of underlying assets
- Market Efficiency: Facilitate arbitrage and informed trading
- Leverage: Allow control over large positions with relatively small capital
2.) Mutual Fund Units:
Mutual fund units represent an investor’s share in a mutual fund scheme.
A mutual fund is a pooled investment vehicle that collects money from many investors to invest in a diversified portfolio of securities, such as stocks, bonds, or other assets, managed by professional fund managers.
Key Features:
- Provide diversification and professional management
- Can be open-ended (buy/sell anytime) or closed-ended (fixed period)
- Units are priced based on Net Asset Value (NAV)
- Suitable for both small and large investors
Types of Mutual Funds:
- Equity Funds – Invest primarily in stocks
- Debt Funds – Invest in fixed-income securities like bonds
- Balanced Funds – Mix of equity and debt for moderate risk
- Money Market Funds – Invest in short-term instruments for low risk
Functions/Benefits of Mutual Fund Units:
- Diversification: Reduces risk by investing in multiple assets
- Liquidity: Easily redeemable in open-ended schemes
- Professional Management: Managed by qualified fund managers
- Affordability: Investors can start with small amounts
- Transparency and Regulation: Operate under SEBI (in India) or related regulatory authorities
