Every financial market instrument represents a particular form of ownership, claim, or financial right. The ownership varies according to the type of asset being purchased. These rights are crucial to Indian investors as they directly impact the voting power, eligibility to dividends, capital appreciation, and risk exposure.
Different instruments cater to various investor objectives, and each has its own legal and financial advantages. In this blog, we will explore the ownership rights across different market instruments.
Equity shares
When an investor buys equity shares of a company, they become a partial owner of that business. To beginners who are trying to comprehend what is stock market, ownership rights are one of the most significant concepts.
The percentage of ownership is determined by the number of shares they own in comparison to the total outstanding shares. Equity shareholders are usually entitled to vote, which means that they can be involved in making crucial decisions of the company, like appointing board members and mergers.
They also receive dividends if the company distributes profits among shareholders. Equity shareholders are residual owners as they get returns only after all liabilities are settled. It also implies that they carry a higher risk but have a higher potential for wealth creation in the long term.
Preference shares
In contrast to equity shares, preference shares offer the investor preferential treatment in terms of dividend payment and capital repayment if the company goes into liquidation. However, these shareholders tend to possess limited or no voting rights.
Conservative investors tend to prefer preference shares because they offer a relatively stable income as opposed to ordinary equity investments. They are a hybrid financial product as they combine the characteristics of both debt and equity instruments.
Commodities and ETFs
Commodity investments such as gold, silver, and crude oil often offer investors exposure to the price movements of the commodity, not the physical commodity. Likewise, Exchange Traded Funds (ETFs) allow investors to buy units of a market-linked fund that are traded in the stock exchanges like shares, but with no actual ownership of the underlying assets.
For example, investors don’t directly own physical gold. Instead, they hold units backed by physical gold held by the fund.
Bonds and debentures
Bonds and debentures are debt instruments that do not give ownership in a company. Rather, they establish a lender-borrower relationship between the investor and the issuer.
When investors buy bonds, they do not own them but become creditors. Their primary right is to be paid regular interest and repayment of principal at maturity. Unlike shareholders, bondholders generally cannot vote on company matters.
Mutual funds
Mutual funds do not operate in the same way as direct ownership of stocks. Investors purchase units of a pooled mutual fund investment vehicle managed by professional fund managers. Their ownership is proportional to the number of units held in the scheme.
This ownership value varies with the Net Asset Value (NAV) of the scheme. Mutual funds provide diversification and professional management and are therefore best suited for investors who lack expertise in selecting individual securities and have a lack of time for daily monitoring of market conditions.
Conclusion
Market instruments have different ownership rights across asset classes depending on the asset type. Equity shares give direct ownership in the business, preference shares offer priority to investors in financial claims, bonds give creditor rights, and mutual funds provide proportional portfolio ownership.
The knowledge of these differences can guide Indian investors to make sound investment decisions based on their financial objectives and risk tolerance.
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