Financial Markets — Fundamentals
Equity markets — how share ownership and trading work
When a company wants to raise capital by selling ownership stakes, it does so through an IPO (Initial Public Offering) — the first sale of shares to the public, after which those shares can be bought and sold among investors on a stock exchange (in India, primarily the NSE and BSE). Once listed, a share's price is determined by market forces — the interaction of buyer demand and seller supply, reflecting collective investor assessment of the company's expected future performance, among other factors. Shareholders may receive dividends — a portion of company profits distributed to shareholders — though dividend payment is at the company's discretion, not a guaranteed return the way bond interest generally is.
Debt markets — bonds and fixed income
A bond is essentially a loan from the bondholder to the issuer (a corporation or government), with the issuer promising to pay periodic interest (the coupon) and repay the principal (face value) at a specified maturity date. Government bonds (in India, issued by the central and state governments) are generally considered lower-risk than corporate bonds, since government default risk is typically lower — this risk difference is reflected in the yield (effective return) bonds offer, with riskier issuers generally needing to offer higher yields to attract investors willing to accept the higher risk. Bond prices and yields move inversely — when bond prices rise, yields fall, and vice versa, a relationship connected to Macroeconomics' interest-rate material (rising market interest rates generally reduce existing bonds' relative attractiveness, pushing their prices down and yields up correspondingly).
Why equity and debt have different risk/return profiles
The fundamental reason equity generally carries higher risk and higher potential return than debt traces back to claim priority: in the event a company faces financial distress or liquidation, debt holders are legally entitled to repayment before equity holders receive anything — equity holders only receive residual value after all debt obligations are satisfied, which could be little or nothing if the company's financial distress is severe. This priority difference is precisely why equity investors demand the possibility of higher returns (compensation for bearing more risk) while debt investors accept generally lower but more predictable returns (compensation for accepting priority but capped upside).
Market indices — measuring overall market performance
A market index (like India's Nifty 50 or Sensex) tracks the aggregate performance of a selected basket of stocks, serving as a benchmark for overall market or sector performance rather than tracking any single company. Indices matter practically because they're commonly used both as a performance benchmark (comparing an individual investment's return against the broader market) and as the basis for index funds (a type of mutual fund, Intermediate, that aims to replicate an index's composition and performance rather than actively selecting individual stocks).