Financial markets provide investors with the most favorable conditions to buy or sell financial instruments. The financial market consists of a variety of financial instruments and the functioning of the market depends entire on the instruments.
Usually a financial market is classified based on the type of financial instruments it holds and the terms of pay off for the instruments. There are different types of financial instruments and they can be classified as securities and promissory notes. In securities, the issuer has to pay a certain amount of money according to the returns after the security pays off all the promissory notes. This is what we call the stock market. The promissory note refers to the right of the owner to get a fixed amount of money in the future.
However, there are other types of securities which are a mix of promissory notes and stock market. These types of financial instruments are called instruments of fixed return, and converted bonds and preference shares come under this type of security.
In a stock market ordinary purchasers of shares can invest their funds into companies. Depending on the number of shares a person owns, he or she can have a say in the process of making decisions in the company. Companies listed in the stock market can be further divided into groups.
1. The first group of companies is the Blue Chip. Usually blue chips are those companies that are large in size, with a long track record of profit, annual turnover of $4 billion, large capitalization and those that consistently pay dividends to their share holders.
2. Then there are companies whose shares grow fast because their managers reinvest the revenue into further development of the company. These companies are referred to growth stocks, and they rarely pay dividends. If they do pay dividends, the payouts are less in comparison to other companies.
3. There are other companies who have high and stable earnings. These companies pay high dividends to their shareholders and are known as income stocks. These companies usually use mutual funds in their plans and are aimed at middle aged and elderly people.
4. Stocks of certain companies stay stable even when the stock market is not performing well. This means that if there is a recession, your risks are minimized if you invest in defensive stocks.
A point to remember is that there is no guarantee of receiving a dividend. A dividend it paid based on the company's profitability and cash flow.
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