Notes on Securities and Securities Market

Introduction to Securities and Securities Market

  • Definition of Securities: Transferrable financial instruments that represent ownership or evidence of indebtedness in an entity's assets.
  • Types of Securities: Include equity shares, preference shares, debentures, bonds, and other instruments.
  • Issuers: Securities are issued by companies, financial institutions, or governments.
  • Investors: Individuals or institutions purchasing securities to convert savings into financial assets for returns.

Objectives of Security Market

  • Issuers raise capital at a cost while investors gain potential returns; complementary objectives.
  • Allows investors to transfer their rights/interests in securities without affecting issuers.

Functions of Securities Market

  • Liquidity Creation: The market connects buyers and sellers, ensuring ease of buying/selling at market prices.
  • Resource Allocation: Transfers resources from those with excess (investors) to those needing funds (issuers).

Types of Market Participants

  • Investors: Providers of funds buying securities.
  • Borrowers: Seekers of funds selling securities.
  • Intermediaries: Facilitate fund and securities transfer.
  • Regulatory Bodies: Oversee orderly market development.

Meaning of Securities

  • Legally defined in the Securities Contracts (Regulation) Act, 1956 (SCRA).
  • Includes:
  1. Shares, stocks, bonds, debentures of incorporated companies.
  2. Derivatives and collective investment instruments.
  3. Securities receipts per the Securitisation Act, 2002.
  4. Units from mutual fund schemes.

Product Definitions and Terminology

2.2.1 - Equity Shares

  • Issued by: Companies.
  • Investors: Individuals and institutions.
  • Features: Fractional ownership in a company, bearing risks and rewards of ownership.

2.2.2 - Debentures/Bonds

  • Issued by: Various issuers including government.
  • Types: Secured/unsecured, convertible/non-convertible.
  • Characteristics: Long-term debt instruments.

2.2.3 - Warrants and Convertible Warrants

  • Issued by: Companies as options to buy shares at predetermined prices.

2.2.4 - Market Indices

  • Tracks market movements using representative stock prices.
  • Major indices in India: Nifty 50, S&P BSE Sensex.

2.2.5 - Mutual Funds

  • Issued by: Mutual funds.
  • Function: Pool investor funds for investment in a diversified portfolio.

2.2.6 - Exchange Traded Funds (ETFs)

  • Invests in indices/commodities; units traded on exchanges.

2.2.7 - Hybrid/Structured Products

  • Preference Shares: Have features of equity and debt, paid before equity dividends.
  • Convertible Debentures/Bonds: Debt instruments convertible to equity.

2.2.8 - Commodities

  • Definition: Homogeneous basic materials; traded in physical or paper form.

Structure of Securities Market

2.3.1 - Primary Market

  • Where securities are originally issued to raise capital.
  • Types of issuances: Public Offers, IPOs, Private Placements.

2.3.2 - Secondary Market

  • Facilitates trading of previously issued securities, providing liquidity.
  • Types: Over-the-Counter and Exchange-Traded Markets.

Participants in Securities Market

2.4.1 - Market Intermediaries

  • Stock Exchanges: Trading platforms such as NSE and BSE.
  • Depositories: Institutions holding securities in electronic form (e.g., CDSL, NSDL).
  • Clearing Corporations: Manage settlements and risks in trades.

2.4.2 - Institutional Participants

  • Types: Include mutual funds, insurance companies, and pension funds.

2.4.3 - Retail Participants

  • Individual investors such as HNIs.

2.4.4 - Proxy Advisory Services

  • Advise investors on voting and shareholder rights.

Transaction Types

2.5.1 - Cash, Tom, and Spot Trades

  • Settlement of cash trades occurs on the same day.

2.5.2 - Forward Transactions

  • Customized agreements to buy/sell assets at a future date.

2.5.3 - Futures Contracts

  • Standardized contracts traded on exchanges with guaranteed settlements.

2.5.4 - Options

  • Contracts giving the right to buy/sell an asset at a specified price.

2.5.5 - Swaps

  • Derivative contracts exchanging cash flows to manage risks.

2.5.6 - Trading, Hedging, and Arbitrage

  • Trading aims for short-term profits; hedging reduces risk; arbitrage exploits price discrepancies.

Dematerialization and Rematerialization

Dematerialization

  • Conversion of physical securities into electronic form.

Rematerialization

  • Conversion from electronic back into physical securities.

Conclusion

  • The securities market is vital for the economy, facilitating capital raising, resource allocation, and providing investment opportunities, while the various instruments cater to diverse investor needs based on risk and return expectations.