Capital Market Instruments consist of long term instruments for the period of more than one year. It includes:

1). Equity Shares- Equity shares represent the owner’s capital in the company. The holders are the real owners of the company.

They have a control over the working of the company.
Equity shareholders are paid dividend.
They provide permanent capital to the company and cannot redeem during life time of the company.

2). Preference Shares – Preference Shares are shares of company’s stock with dividends that are paid out to shareholders before common stock dividends are issued. These shares have their certain preferences as compared to other types of share. These shares are given two preferences such as:

Whenever the company has distributable profits, the dividend is first paid on preference shares.
Repayment of the capital at the time of liquidation.

3). Debentures- A debenture is an acknowledgement of a debt. It is a document under company’s seal which provide for the payment of principal sum and interest thereon.

A debenture holder is a creditor of a company and interest is paid to him.
Debentures are to be repaid after a definite period of time.

4). Derivative – A derivative is a security with a price that is dependent upon or derived from one or more underlying assets. Derivative is itself a contract between two parties based upon the asset or assets.

The underlying assets include stocks, bonds, commodities, currencies.
It can be traded over the counter or an exchange.
Derivative can be classified as follow:

Futures Contract- Futures Contract is an agreement between two parties for the sale of assets at an agreed upon prices.
Forward Contract- Forward Contract is similar to futures contract but the only difference is this that it is not traded on exchange but only traded on over the counter.
Swaps- It is a contract between two parties agreeing to trade long terms.
Options- It is also similar to futures contract but the key difference is that with an option buyer and seller is not obliged to make transaction if he or she decides not to.

5). Bonds- A bond is a debt investment in which an investor loans money to an entity which borrows a fund for a defined period of time at a variable or fixed rate interest. It is similar to debentures but the key difference is that it is issued by a government institute.

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