On the stock market, investors can buy and sell shares, bonds, and other types of financial assets. A stock exchange is a platform where investors and traders can buy and sell shares.
The two biggest stock exchanges in India are the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). Also, businesses can list their shares for the first time on a market called the primary market. The shares are then bought and sold again on the secondary market.
Roles of Stock Market Participants: A stock market is a place where financial products can be bought and sold. Brokers, traders, and investors must register with SEBI, the exchange (BSE, NSE, or regional exchanges), and the companies they work for before they can trade (listing their shares).
Securities and Exchange Board of India (SEBI): SEBI is the market regulator whose main job is to make sure that the Indian stock market runs smoothly and openly so that average investors can invest without worrying. SEBI has set up rules that all exchanges, businesses, brokerages, and other participants must follow.
Stockbrokers: Members of exchanges are stockbrokers. They are the middlemen who carry out investors' buy and sell orders in exchange for a fee. In the Indian system, investors must trade through broking houses or brokers, who act as middlemen.
Investors and traders are the two main types of people who take part in the market. When investors buy stock in a company, they want to keep it for a long time and make money from it. traders buy and sell stocks, while investors only buy and hold stocks.
Investors' actions are influenced by the success of a company, its potential for long-term growth, dividend payments, and other similar things. On the other hand, traders are affected by price changes as well as supply and demand.
Let's talk about the two types of markets we've already talked about.
When you trade on the stock market, you try to match buyers and sellers. Your broker sends your offer to buy to the stock exchange, which then compares it to a seller's offer. Once the price has been set, the exchange tells your broker that the trade is done. At that point, the transaction takes place. In the meantime, the bourse checks the information of the buyer and seller to avoid defaults. After that, the actual transfer of stocks takes place to end trading.
The process used to take days, but digitization has helped cut the time down to T+2, or within two days of the transaction, and work is being done to get it down to T+1.
There are two main reasons why some stocks are called "preferred stocks." The regular dividends paid to people who own preferred shares are more than those paid to people who own common shares. Common stocks pay dividends based on how profitable the company is. Preferred stocks, on the other hand, pay dividends that have already been decided. Preferred stocks are different from common stocks in that they don't have the right to vote.
In some ways, preferred stock is like a bond. They all have a face value that is used to figure out the dividend. Let's say that a preferred stock is worth Rs 1,000 and gives a 5% dividend. If the stock is still being traded, it must pay an annual dividend of Rs 50. Preferred stock is riskier than a bond but less risky than regular stock.
Even when a company does well, the value of preferred stocks is not likely to go up by much. So, it is less likely that a person who owns preferred stock will make big money.
Preferred stocks come in many different forms. If you have convertible preferred shares, you can change a preferred stock into a common stock. Also, preferred stock can add up over time. This means that when business is slow, the company might put off paying dividends. But when things get better, they have to pay the dividends that they owe. This must be done before any payments can be made to common stockholders. Another type is redeemable preferred stock. In this case, the business has the option to buy the stock back at a later date.
Know these things about dividends
1. Most companies pay dividends based on their yearly, quarterly, or even one-time profits.
2. The Income Tax Act of 1961 says that income from dividends is taxed.
3. Companies can choose to pay either common dividends, which are payments that change based on how much money they make or preferred dividends, which are payments that always stay the same.
Investor Benefits from Dividends:
Dividends are a predictable, low-risk way for investors to get a return on their investments. Also, as the companies grow, the dividends go up, which makes the stock worth more to investors. You can also use the dividends to buy more shares.
Investors should keep in mind that dividend yields that are higher are not always better. This is because some companies that pay high dividend yields find it hard to keep up these rates over time.
Dividend stocks are a type of stock that is traded on the stock market. These stocks belong to a group of companies that have a history of giving dividends to shareholders. Since these stocks are well-known, have already reached their peak, and are mature, their future growth potential is often much lower than that of growth stocks.
When looking for money, a business needs to think about two main sources. It can raise money through equity, which means selling shares, or through debt, which means borrowing money from lenders through debentures and other debt instruments. In this case, the company gives investors a piece of the company in exchange for their money. There are different kinds of shares, such as preferred shares and equity shares. This article is meant to help you learn more about equity shares, including how they work, what their pros and cons are, and how they can be used.
How do shares work?
Equity shares are a type of long-term financing that businesses that need money can use. Each equity share is a small piece of ownership in the business. People can invest in equity shares, which are also called common stock or common shares.
Investing is riskier than saving, but it can give you higher returns and help you reach your financial goals faster if you do it right. Equity shares are seen as a long-term way for businesses to get money to run their businesses. People who own preference shares can make use of a number of benefits and advantages.
Voting rights: One of the best things about having equity shares is that you can vote for general managers and other company officials and have a say in how the business is run. This is because the way a company runs has a direct effect on the returns it gives to equity shareholders. If you own a large number of equity shares, you also have a large number of voting rights.
Attending meetings: People who own equity shares are allowed to sit in on all annual and/or general body meetings of the company and have a say in how the family business is run through their voting rights.
Dividends: They can also be paid to people who own equity shares. In this area, though, the benefits for people who own common stock are different from those for people who own preferred shares. Dividend payments to equity owners are not set in stone. They can change depending on how well the company does and whether or not certain goals are met. So, people who own equity stocks have a right to dividend payments, even though these payments are not promised. Dividends are set, though, for people who own preference stock.
Equity shares cannot be redeemed, which means that investors will not get their money back as long as the company is in business. When the company goes out of business, equity shareholders will either get this money based on the value of their equity shares at that time, or they can sell their equity shares to get it back.
There are a lot of companies that only give out common stocks, and more common stocks are traded on stock exchanges than preferred stocks. Common investors, on the other hand, have the least chance of getting any of their money back if a company goes bankrupt. Paying back the people who loaned money to the business comes first. If there is still money left over after creditors are paid, it goes to the people who own preferred stocks. There is a limit to how much of this you can get. Common investors only get their money back if there is still money left over.
Stop loss is like a gauge that tells you how much you could lose on a trade. It's important to set your stop loss ahead of time so you can be ready if a trade goes in a different direction. A stop-loss order is used to cut down on the loss if the price of a stock doesn't move as expected and makes the traders lose money.
A day trader sets her stop loss level before she makes her trade. When the cost hits the predetermined stop loss level, the trade ends automatically. The trader can keep the rest of the money she has put in. One can start making a plan for getting the lost money back. By putting in a stop-loss order, a losing trade doesn't lose any more money.
How does Stop Loss work?
Let's look at an example to see how a stop loss would show up on a trade. You must now decide where to put your stop loss. For example, if you want to buy a stock that is selling for 105 right now, you must decide where to put your stop loss. Keeping the stop loss below 100, at 99, is a great goal. This means you are willing to lose Rs 6 on this particular trade.
You should also set your target at 1.5 times the percentage of the stop loss. In this case, the stop loss was set at Rs 6, which you were willing to lose. So, you should try to get at least 9 points, which would bring you to 105 + 9 = 114.
Where should your stop loss be?
Most new traders have a hard time figuring out where to put their stop loss settings. If the stop loss level is set too high and the stock moves against you, you could lose a lot of money. Instead, traders who put their stop loss level too close to the purchase price lose money because their trades are closed out too quickly.
There are different ways to figure out how much each trade's stop loss should be. From these strategies, you can figure out three ways to choose where to put your stop loss:
How does Stop Loss work?
Intraday traders often use the percentage method to figure out where their stop losses are. With the percentage approach, all a trader has to do is say what percentage of the stock price they are willing to lose before they close the position.
Think about the case where you don't mind if your stock loses 10% of its value before you sell it. And let's say that one share of your stock is currently worth 50 cents. So, your stop loss would be Rs 60 x 10%, or Rs 6, less than what the stock is worth on the market right now.
Determine Stop Loss Using the Method of Support
Using the support method to figure out stop loss is a little harder for intraday traders than using the percentage method. But it is often used by intraday traders who know what they are doing. For this strategy to work, you need to know what your stock's last support level was.
Zones of support and resistance are places where the stock price often stops going up or down. Once you've found the support level, you only need to set your stop loss price point below that level. Let's say you own stock that is now selling for Rs 500 per share, and the most recent support level you can find is Rs 490. It is recommended that you put your stop loss just under 490.
Most of the time, the levels of support and resistance are not exact. Before quitting a trade, it's smart to give your stock a chance to fall and then bounce back from the support level. Set the bar just a little bit below the support level to give your stock some room to move before you decide to close the deal.
Using the Moving Averages Method to Figure Out the Stop Loss
Compared to the support method, the moving average method makes it easier for intraday traders to decide where to put their stop loss. A moving average has to be put on the stock chart first. A longer-term moving average is better because it keeps you from putting your stop loss too close to the stock price and getting out of your trade too soon. Once you've put in the moving average, set your stop loss a little below it so it has more room to move in either direction.
When an investor sells shares he does not own, this is called "short selling." In a short sale, a trader borrows shares from the owner with the help of a brokerage. The trader then sells the shares at market value, hoping that prices will go down. The person who sells short buys the shares at a loss and makes money when the prices go down. It's important to know that short selling is done by experienced traders and investors who think that the price of shares will go down before they are returned to the owner. Short selling has a high risk-to-reward ratio because you could make or lose a lot of money.
Information about short sales:1. In a short sale, the seller does not own the stock that is being sold. They are borrowed from someone else.
2. Both individual investors and large groups of investors can do short sales.
3. Short selling is based on guessing what will happen.
4. The seller bets that the price will go down by using short selling. If prices go up, the seller will lose money.
5. Traders have to do what they have to do and give the shares back to the owner when the trade is settled.
6. It's important for investors to know that the deal is a short sale.
7. Most of the time, short selling happens when the market is down and the price drop is big.
On the stock market, a short sale is done when people want to make money quickly. Some people say it's like holding on to stocks for a long time. Long-term investors buy stocks with the hope that their prices will go up in the future. Short-sellers, on the other hand, watch the market and profit when prices go down.
How does the short sale process work?Pros of short-selling:
Financial experts have had a lot to say about the benefits of short selling. Even though this approach has been criticised, market watchdogs all over the world support it because it helps fix irrational overpricing of any stock, provides liquidity, stops bad stocks from rising quickly, and makes sure promoters can't change prices.
Short-selling is an illegal practice that market manipulators often use to raise stock prices artificially. Because of this, there is a higher chance of market instability and more volatility. The planned drop in stock prices could hurt the company's confidence and make it harder for them to raise money.
A "naked short sell" when a trader sells shares without borrowing them or making plans to borrow them. If the trader doesn't borrow the shares before the clearing time, he or she can't give them to the buyer. The trade is said to have "failed to deliver" if the trader doesn't close the position or borrow the stock. Since it goes against the laws of supply and demand, naked short selling is illegal in most countries. If a large number of naked short sales are made, the market can become unstable.
Short selling is not a good idea for new traders and gamblers who don't understand the risks. Short selling should only be done by people who know a lot about how the market works.
Equity delivery, which is also called "delivery-based trading," is one way to trade on the stock market. In an equity delivery, you buy some shares and store them for a while in your demat account. In delivery trading, you can keep the shares for as long as you want once they have been sent to you. You own all of the stocks you buy, so you can keep them until the right time to sell them and make a good profit. Intraday trading, which is the second most common way to trade stocks and involves buying and selling shares during the same trading day, is the opposite of this. When you do intraday trading, you don't have to pay the full price of the stocks. But if you want to buy shares in delivery, you must have enough money in your account because there are no margins.
Let's look at some ways to invest that will give you better returns:
Don't put all your eggs in one basket. This saying is also true for shares. Mix and match things. Try to buy a wide range of stocks when you buy shares. After doing your research, pick a few businesses in different fields. Choose companies that do business in the areas you think have the most potential. Diversifying your investments will help you because you will make money if good things happen in any of them.
Be patient. The stock market is so unpredictable that it will often test your patience. There is always a chance that the value of the shares you buy will go down. The price of each share changes from time to time. Don't get scared and sell your shares just because the price is going down. Delivery-based trading is much better than intraday trading because you don't have to sell your shares in a certain amount of time. If you stay calm, your chances of making money will go up. Most traders wait to sell their shares until they reach their cost price.
What does it mean to deliver equity?Among the benefits of delivery-based trading are:
There is no waiting period, so you can keep the shares even if the market is going down and sell them when the price is right.
Some banks and other financial institutions give loans based on the stock you own. So, when you are going through a hard time, your shares can help you out.
If you see that a company is making money, they might declare a dividend per share. Then, if you own shares in these companies, you will get dividends for each share.
If you keep your money in a bank, you will only get 6-7% in interest per year. But if you use that money to buy shares in companies that are growing, you could make 15% or more on your money. Even some stocks can give you returns of 30–40% per year. Long-term trading is the best way to make money on the stock market.
If a company makes a lot of money, it might give out bonus shares. If they say 1:1, you could get a free share in addition to the ones you already own.
Do your research on the companies whose shares you want to buy before you buy them. Try to buy the shares when they are trading for less than what they are worth. If you do this, your chances of succeeding will go up. Knowing when to buy and when to sell is helpful for both intraday traders and traders who buy and sell for delivery.
There are primarily two categories of intraday traders: independent traders and traders employed by institutions. The majority of day traders who make their living through intraday trading are part of larger institutions. As a result, they receive some of the institute's advantages, including a direct line, trading desk, solid cash, and analytical tools. They look for ways to make money quickly, and their resources also let them take advantage of trading opportunities that are safer.
Individual traders can either use their own money to trade or help other people manage their money. They often work with a brokerage and have access to more information.
Intraday traders need to have access to some high-end financial services and tools. Those are:Trading desk:
Traders who work for large institutions and are in charge of a lot of money are usually the only ones who can use a trading desk. A trading desk enables intraday traders to immediately execute orders, which is essential when there are quick price changes.
Multiple news sources:
News is an important tool for intraday traders because it gives them the best chance of making money. So, you will have more chances to use something important if you find out about it as soon as it happens. They might have a type pf high-end scanner that captures real-time news about companies and use them to go long or short in a stock.
Both trading software and analytical software will give you an edge over your rivals. Some traders rely less on news and more on things that can be seen on the market. Automatic pattern recognition is a type of software that traders use to look at data. Back testing and applications based on genes and neurons are also used.
What makes someone a successful intraday trader?Know-how and experience: Technical analysis and being able to read charts are useful skills, but you need to understand the market in order to make sense of the information you find through analysis. Spend some time getting to know the details of the product you're trading in.
Enough money to trade with: As a day trader, you should only invest the money you can afford to lose. By putting limits on yourself in this way, you can protect yourself from a financial disaster and avoid making decisions based on how you feel.
When doing intraday trading, you often need a lot of money if you want to take advantage of changes in the market. If you have access to a margin account, it could be helpful because sudden changes can cause margin calls without giving you enough time to prepare.
Traders need to have a strategy that gives them an edge over the market. You can use different strategies, some of which are talked about in the next section. Work on and improve these strategies until you find one that works for you.
Discipline: A lot of traders lose money because they don't stick to their own rules when making trading decisions. The unpredictable nature of the market has a big effect on day-to-day trading. If the price of a stock changes a lot during the day, traders may want to buy it.
Day traders also choose highly liquid stocks because they can change their positions quickly without affecting the price of the stock. When the price of a stock goes up, traders often take a position to buy. If the price goes down, you might decide to short sell it so that you can make money from the drop.
Types of intraday traders:Scalping: It is an attempt to make a lot of small profits from daily price changes.
Range trading: In range trading, support and resistance levels are used to decide whether to buy or sell.
Trading based on news: This strategy quickly takes advantage of the volatility that happens when breaking news happens to trade in a way that makes money.
High-frequency trading (HFT) is a strategy that uses complex algorithms to take advantage of brief drops in the market's efficiency.
Intraday trading has so many benefits that it's not surprising that so many people want to try it. The market needs active and effective intraday traders. You could also do well as an intraday trader if you have the right tools and are willing to learn what you need to know.
Intraday trading seems to be picking up steam in India with more traders opening demat accounts everyday. Even though it might seem like a lucrative career option, it comes with multiple issues as well. Here are the pros and cons of intraday trading.
1. Quick Money
Day trading, unlike long-term investments, can bring in money very quickly. The profit or loss will be displayed in your trading account right away, based on your exit plan and performance. You can choose whether to put the money in your bank account or put it back into your trading capital pool.
2. No danger at night
By not leaving your stocks on the market overnight, you can reduce the risk of overnight volatility when you day trade. Stock prices often change between when the market closes and when it opens, because of news and other things. This change could have an effect on the price of the stock.
3. Make money in down markets
One of the best things about day trading is that you can still make money even when the market is down. Instead of buying a stock, you can sell it short and then buy it back to make money. So, you can make money whether the market is going up or down. This benefit isn't usually a part of investment opportunities.
Dangers of day trading
There are also some bad things about trading every day. If you want to be a successful trader, remember these problems so you can avoid them.
Consistency is needed to deal with risk in markets that change a lot.
The chance of losing money
How to Start Trading Day Trading
Before you can start trading on the stock market, you have to open a trading account and a DEMAT account. If you are an experienced trader who wants to try stock market intraday trading, you might open a new account to keep your trading separate. When you have different accounts, it's easier to keep track of things. Due to the different ways that intraday trades are taxed, setting up a separate account makes tax calculations easier. Open a demat account with Zebu to benefit from a host of tools and benefits.
After that, you can sign up for the tools you need for intraday trading. You can obtain various tools to help you with intraday trading after creating an account. Spend some time looking at daily charts before you start trading so you can become familiar with the patterns of price movement. There are many courses available that offer technical analysis education, and these could also be beneficial.
By following a few simple rules, an intraday trader who is just starting out can increase their chances of making money and decrease their chances of losing money. Here are some of the rules that you must know.
Don’t use your full capital:
Even if you like the excitement of the stock market, it's not a good idea to put a lot of your money into "intraday trading." Don't put in more than you can afford to lose. Don't put more money into trading than you can afford to lose, even if other traders are doing well.
Exit at the end of the day:
Always close out your trades at the end of the day. Do not keep holding onto securities in the vain expectation of making more money or minimising losses the following day. This rule is applicable especially if the general climate of the market indicates volatility.
Watch the market at all times:
You can't have all-day business meetings or long flights when the market is open. You have to be quick and aware to make the deal when the price is right. If you don't keep track of how your chosen stocks rise and fall, you might miss out on a good selling price.
Exit as soon as the trend goes against you:
As soon as you realise that the market has gotten worse, you should get out. If you wait until the stop-loss conditions are met, it may be too late and cause you to lose more money. With experience, you can become a discretionary trader instead of a systematic trader.
Don't put money into too many marketplaces at once:
Based on the quantity of capital you have, choose your market. Most of the time, you need the least amount of money to trade on the currency market, while you need a little more money to trade on the stock market.
Find the best time for trading during the day and stick to it:
Develop and use a good intraday trading strategy over time and with more knowledge. Intraday trading is all about finding a method that works for you and using it over and over again to make more money.
Stocks that are good for intraday trading should have volatility that ranges from moderate to high and be easy to buy and sell. For a beginner, it's best to start by focusing on just one or two stocks at a time.
Intraday trading is the act of buying and selling stocks and ETFs during regular trading hours within the same day. You can buy or sell shares quickly without having to go through the trouble of getting real share certificates. Intraday trading is based on the idea very short term price movements can be capitalised. Shares are bought for less money and sold for more money. The difference between the two rates is the profit.
Understand how investing and trading are different.
Trading and investing are two very different ways to put money to work. Just because you know how long-term value and growth investments work doesn't mean you're automatically good at day trading. For day trading, you don't use the same criteria to choose stocks as you do for long-term investments. Day trading uses market volatility to make money, but long-term investments are made so that they can handle daily market volatility.
Let's take a look at the basics of intraday trading in India.Choose stocks that are easy to buy and sell:
Day trading requires you to close out your position before the end of the day. If you buy a stock that doesn't have enough liquidity, you might not be able to sell it when you want to. One of the most important rules of day trading is to only trade in liquid stocks. When there is enough liquidity, there are no limits on how much can be traded. When there are a lot of buyers and sellers of liquid stocks, the prices fluctuate, which is what day traders need to make money.
Day trading is a sure shot way to lose your capital if you do not do your research. Before you buy or sell any shares, you should do a lot of research on them. Choose stocks in a field you know a lot about. Before you start trading, watch how the prices of the shares you've chosen change, as well as other signs like volume and liquidity.
Choose stocks in the same trend as the broader index:
Price changes can be caused by many things, but some stocks move in the same way as larger indices. For example, these stocks will go up if the Nifty goes up and down if the Nifty goes down. But a large number of stocks don't follow a predictable pattern, so you should be careful when dealing with them.
Recognize the right price:
If you want to make money on an intraday trade, you must choose the right entry and exit prices. Traders use support and resistance levels in a number of ways to choose the right entry and exit prices. Some traders close out their positions when a trade starts to make money, while others choose to go with the trend. Your approach might be different, but you should always keep your cool and stick to the plan.
Set up a stop-loss:
Brokers offer a lot of leverage for intraday trading, which increases both the chance of making money and the chance of losing money. Setting a stop loss is important because day trading can lead to big losses. A stop-loss limit closes your position when the share price goes over a certain level.
These are some of the must-know tips for beginner traders who are looking to trade in equity in the share market online.
Intraday trading is a word that means exactly what it says: trading that takes place during the same day. One thing an intraday trader needs to understand is what is called "open interest."
What is open interest?
In its simplest form, open interest (OI) is the number of active contract numbers at the end of each trading day. These are positions that are still open and haven't been closed yet. Open interest is a way to measure how busy the futures and options markets are in general. For every new position that a buyer and a seller take, the open interest goes up by one contract. When traders close their positions, the number of open contracts goes down by one. If a seller or buyer transfers their position to another seller or buyer, the open interest doesn't change.
If the OI has gone up, it means that the market is getting more money. If the OI is going down, the current trend in prices is about to end. In this way, the OI shows how prices change over time.
It describes participation
Traders should also know that open interest and volume are not the same thing. Volume is the number of contracts that are bought and sold in a day. Volume is a measure of how many contracts have been made between the seller and the buyer. This is true whether a new contract was made or an existing contract was changed. The main difference between open interest (OI) and volume is that OI shows how many open and active contracts there are, while volume shows how many were actually executed.
How prices change and what they do
Another thing to think about when talking about OI is how the price moves. In trading, price action is the way a graph shows how the price of a security changes over time. It refers to whether the price of a certain security is going up or down.
Most traders analyse the market based on volume, Open Interest (OI), price, and other market indicators. In general, a market is strong when the price is going up, the volume is going up, and the OI is going up. On the other hand, a market is weak even if the price is going up if the other two indicators are going down.
Here are a few tips for traders who want to use OI to keep an eye on how the market is doing:
When the OI goes up and the price goes up at the same time, there is a lot of money coming into the market. It shows that there are buyers, so it's seen as a good sign for the market.
– When prices are going up but the OI is going down, money may be leaving the market. This means the market is going down.
– Even if the OI is sky-high and the price drops sharply, this is still a bearish sign for the market. This is because it looks like people who bought at the peak have lost money. In this case, there is a chance that people will sell out of fear.
– If prices are going down and the open interest is also going down, it means that holders are feeling pressured to sell their positions. This shows that the market is bearish. It can also mean that the best time to sell is coming up.
OI is important because it shows how many contracts are open or active in the market. When more contracts are added, OI goes up. When a contract is squared off, the open interest goes down. Volume is another word that is often used with the term "open interest." The volume shows how many trades were made on a certain day. It doesn't last into the next day, though. On the other hand, OI is live data because it affects what happens the next day.
Together, open interest, price, and volume data help intraday traders understand how the market is doing. Using this information, an intraday trader can figure out if the market is going up or down.
Bonds are debt market products that, as their name suggests, pay a fixed interest rate annually or at regular intervals and can be redeemed at the end of a certain time period. Bonds are fixed-income securities that act as a private company's assurance to raise money for operating costs. Most of these bonds are traded on the secondary market and are also available to investors as "dematerialized" bonds. Before you buy private sector bonds, here are some things to think about.
1. Is it backed by a reputable business group?
These corporate bonds from the private sector are at risk of default, but government bonds are not. As an investor, default risk may have two effects on you. First, the company can have bad financial results and be forced to stop making principal repayments and periodic interest payments. Second, even if the bond is traded on the stock market, it could be downgraded by the rating agencies. This would cause the price of the bond to drop.
2. Don't try to find more ways to make money
Going down the grading curve to find higher yields on private bonds is very common, even among fund managers. For instance, a corporate bond with a AAA rating will have the lowest interest rate. But if you choose bonds with an AA or A rating, the yield will be higher because these companies are more likely to pay higher rates than AAA companies. Even though not every AA or A-rated company will go bankrupt, it is a risk, so you should be careful. If you can't sell the bond on the secondary market or don't have time to keep an eye on how the company is doing, the risk is higher.
3. Keep in mind that private-sector bonds make you pay more in taxes
Your actual returns depend on how the tax treatment works out in the end. When you buy private bonds, the interest you earn is taxed at your highest rate, say 30%. So, if the bond pays you an interest rate of 11%, your real yield after taxes is only 8.7%. (11-3.3). Even though the lock-in term may be longer, it may be better to invest in an infrastructure bond that saves taxes. For example, if the interest rate on a tax-free bond for infrastructure is 6.5%, the effective after-tax yield will be 9.3% (6.5/0.7). In reality, an infrastructure bond has a higher effective yield and a much lower risk of default.
4. You might find that investing in debt funds is a better idea
If you want stability, debt funds may be a much better option for you. Debt funds let you benefit from both the interest on bonds and the growth of your capital when interest rates go down. The second benefit of debt funds is that they build a portfolio of different types of debt instruments with different levels of risk. This makes your overall exposure risk much lower. It's hard to come up with this much variety on your own. Third, unlike bonds, which are usually hard to sell quickly, debt funds are easy to buy back. Price anomalies can also make it so that the prices don't reflect the bond's true value. Last but not least, debt funds are much better than private sector bonds when it comes to taxes. If you choose a debt fund's dividend plan, you can take out the profits without having to pay taxes because dividends from debt funds are tax-free in the hands of the investor.
The yield on private sector bonds is a little bit higher than that on bank FDs, but the risks are also a little bit higher. Before putting money into private sector debt, you should know this.