In the investment arena, there are multiple capital market instruments from which investors can choose from. Traditional securities can be used in the equity and debt capital markets, although there are also some more sophisticated market instruments that are traded in the alternative segment. Equity securities are largely stocks, including common and preferred shares, while bonds are the instruments that comprise the debt capital markets. Non-traditional investments include futures and options contracts, which are financial securities that gain their value from another asset, such as a stock or bond.
Stocks are equity capital market instruments that are generally widely traded by investors. By acquiring equity shares, investors obtain a stake in a publicly traded corporation. The greater the number of shares owned, the higher the equity ownership is. Based on the size of an allocation, or investment, an investor who owns equity shares can typically cast a vote on major company events, such as a merger or acquisition. Voting shares are generally reserved for common stakeholders, who are investors who purchase the most available type of equity shares.
Preferred equity shares are another type of capital market instruments. These financial securities typically deliver consistent dividends to investors. The market value, or price, of the preferred share of stock does not tend to fluctuate very dramatically. Investors often depend on the income generated from dividend distributions, which are made from a company's profits, for returns. Common stockholders might also earn dividend distributions, but preferred shareholders generally have priority over these payments.
Debt securities are another type of capital market instruments called bonds; these may be issued by a government, municipality or corporation. The issuer borrows money from investors and, in exchange, pays interest to lenders for the duration of the financial security contract. Investors are also reimbursed the face value of the bond once the contract expires. Bonds are typically issued for a period of months or years, and interest rates are often dependent on the state of the economy and the credit worthiness of the issuer.
Derivatives, such as options and futures, represent a kind of capital market instruments. Options are contracts that provide an investor or trader the opportunity to buy or sell a financial security, such as a stock or bond, at a later date at a price that is established beforehand. Futures contracts are similarly based on an action that will take place at a later point in time. Investors and traders must either follow through with a futures contract and receive delivery of an underlying item, which could be a commodity such as sugar, for instance, or settle a contract for cash.