Chapter 2: Introduction To Securities Market

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Chapter 2: Introduction To Securities Market – NISM-Series-XV Research Analyst Exam Study Notes Download PDF Book

Introduction to Securities and Securities Market

Understanding Securities and Securities Market

Short Pointers:

  1. Securities are transferable financial instruments showing debt or ownership in assets.
  2. Types include equity shares, preference shares, debentures, bonds, etc.
  3. Issued by companies, financial institutions, and governments.
  4. Investors buy securities to convert savings into financial assets with returns.
  5. Issuers raise money through securities, allowing transfer of investor rights/interests.
  6. Securities market enables capital movement, connecting buyers and sellers for liquidity.
  7. Market facilitates resource transfer from savers to productive users.
  8. Financial market includes investors (buyers), borrowers (sellers), intermediaries, and regulatory bodies..

Understanding Securities as Defined in SCRA, 1956

Short Pointers:

  1. Securities Definition: Section 2(h) of Securities Contracts (Regulation) Act, 1956 (SCRA) defines ‘securities’.
  2. Inclusive Elements:
    • Shares and Similar Instruments:This includes shares, scrips, stocks, bonds, debentures, and similar marketable securities for companies or pooled investment vehicles.
    • Derivatives: Financial instruments deriving value from underlying assets or benchmarks.
    • Collective Investment Schemes: Instruments issued by these schemes, such as units.
    • Security Receipts: As per Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
    • Mutual Funds: Units or instruments issued under mutual fund schemes.
  3. Exclusions:
    • Insurance Products: Unit linked insurance policies and similar instruments combining life insurance and investment, issued by insurers, are not considered securities.
  4. Additional Securities Types:
    • Pooled Investment Vehicles: Instruments issued by these entities.
    • Special Purpose Entities: Certificates acknowledging investor interest in assigned debts or receivables.
    • Government Securities: Debt issued by the government.
    • Central Government Declarations: Other instruments declared as securities by the Central Government, e.g., Electronic Gold Receipts.
  5. Investor Options: Wide range of financial products available in the Indian market, categorised into equity, debt, and derivative products.
  6. Electronic Gold Receipts: Example of a security declared by the Central Government, representing electronic receipts for deposited physical gold, regulated by SEBI.
  7. Further Learning:A detailed exploration of these securities is in the next section of the textbook.

Product Definitions / Terminology

 Overview of Financial Instruments in the Indian Securities Market

Short Pointers:

  1. Variety of Instruments: The Indian Securities Market offers a diverse range of financial instruments.
  2. Risk and Return Profile: Each instrument has unique risk and return characteristics.
  3. Investor Suitability: The suitability of these instruments varies based on individual investor needs and preferences.
  4. Objective: The section aims to explore major instruments available in the market.
  5. Key Focus: Understanding the nature and specifics of each instrument to aid in informed investment decisions.

Equity Shares

Short Pointers:

  1. Nature of Equity Shares: Represent fractional ownership in a business venture.
  2. Issuers: Issued by companies or various issuers.
  3. Investor Types:
    • Institutional: Includes Foreign Portfolio Investors (FPI), Foreign Institutional Investors (FII), Domestic Institutional Investors (DII).
    • Individual: Encompasses Retail investors and High Net-worth Individuals (HNI).
  4. Issuance Medium:
    • Directly by companies.
    • Via Stock Exchanges.
  5. Regulatory Bodies:
    • Securities and Exchange Board of India (SEBI).
    • Regulators under the Companies Act.
  6. Ownership and Responsibility: Equity shareholders collectively own the company and are responsible for bearing its risks.
  7. Benefits of Ownership: Shareholders enjoy the rewards, such as profit sharing and potential increase in share value.

Debentures/Bonds/Notes

Short Pointers:

  1. Purpose: Instruments for raising long-term debt.
  2. Issuers:
    • Companies, Government, Special Purpose Vehicles (SPVs), Other Issuers.
  3. Investors: Both Institutional and Individual investors.
  4. Medium of Issuance:
    • Direct issuance by issuers.
    • Through the Stock Exchange (if listed).
  5. Regulation:
    • Reserve Bank of India (RBI).
    • Securities and Exchange Board of India (SEBI).
    • Regulators under the Companies Act.
  6. Types of Debentures/Bonds:
    • Fully Convertible: Convertible into ordinary shares of the issuing company, with conversion terms specified at issue.
    • Partly Convertible Debentures (PCDs): Partially convertible into ordinary shares under specific terms. The non-convertible part is redeemed like a standard debenture.
    • Non-Convertible Debentures (NCDs): Pure debt instruments, repayable/redeemable at maturity without conversion features.
  7. Nature of Instruments: Can be pure debt or quasi-equity.
  8. Short-term Debt Instruments:
    • Treasury Bills: Issued by the government for periods not exceeding one year.
    • Commercial Papers: Issued by companies for short-term debt.
    • Certificate of Deposit: Issued by banks for short-term debt.

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Related posts:

  1. Chapter 5: Economic Analysis
  2. Chapter 8: Company Analysis – Financial Analysis
  3. Chapter 9: Corporate Actions
  4. Chapter 10: Valuation Principles
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