Which of the instruments traded in the stock market is more risky?
The stock market is a market where investors can trade with various financial instruments. Instruments traded on the exchange include products such as stocks, bonds, bonds, futures and options contracts, exchange-traded funds, warrants, certificates. Each of these tools has different features, returns and risks. So, which of the instruments traded in the stock market is more risky?
In the stock market, risk can be defined as the probability of deviation from the expected return of an investment. That is, when an investor invests in an instrument in the stock market, he expects the price of that instrument to rise or fall. However, if the price moves in a different direction or at a different rate than expected, the investor may make a loss or reduce his profit. For this reason, risky instruments in the stock market are instruments with more fluctuating prices and less predictability.
Stocks and derivatives are generally the riskiest among the instruments traded on the stock exchange. Stocks are shares that represent a certain proportion of a company's capital. Shareholders become partners in the profit or loss of the company. The prices of stocks, on the other hand, vary depending on many factors such as the performance of the company, the state of the sector, economic and political developments, supply and demand. With the effect of these factors, stocks can both provide very high returns and cause huge losses.
Derivatives, on the other hand, are instruments that determine the future price of a certain asset, such as futures and options contracts. In derivatives, investors agree on a specific date and price to buy or sell the related asset. The prices of derivative products, on the other hand, vary depending on factors such as market conditions, interest rates, volatility, as well as the price of the relevant asset. Due to the leverage effect in derivative products, a large position can be taken with a small investment. This can increase both gain and loss.
Among the instruments traded on the stock exchange, the less risky ones are instruments such as bonds, bills, exchange-traded funds. Bonds and bills are debt instruments of government or private entities. Bonds and bills holders receive repayment from the lender with a specified interest rate and maturity. The prices of bonds and bills vary depending on factors such as interest rates, inflation, and ratings of credit rating agencies. Bonds and bills are generally less risky than stocks as they are fixed income.