An insight of debt classes

   All the share tips providers describe every investment option in terms of its risk and return characteristics. For example, the returns on the equity shares of a company would depend upon the profits the company makes and the business risks that the company faces. This translates into the possibility of a higher long term return if the company’s performance is good. But in the short-term the holder of equity shares is likely to see a good amount of volatility in returns, as market participants evaluate the impact of different factors on the expected performance of the company and incorporate their view in to the price of the share. The returns from bonds of a company would depend on the ability to generate enough cash to pay interest, even if the company would make losses or a minimal profit. This translates into steady periodic return, with limited possibility for capital appreciation. A group of investments that exhibit similar risk and return characteristics, and respond in a similar fashion to economic and market events are grouped together as an asset class. 24 Carat Financial Services provides best option trading tips to the traders in the market.

Example: Debt vs. Equity

A company that makes garments for export finds that a large order has been cancelled and its profits may decline. Let us discuss what effect this event will have on the lenders and owners of the company.

The return to owners of a company depends upon the profitability of the company which is expected to decline with the cancellation of the export order. Their returns will therefore, come down. But the lenders will earn the fixed interest irrespective of the decline in profits.

Investment options with conceptually similar risk-return features can be clubbed together into asset classes.