Security

Security What is a Security? §A security is a fungible, negotiable instrument representing financial value. Securities are broadly categorized into debt securities, such as banknotes, bonds and debentures, and equity securities, e.g. common stocks. §The company or other entity issuing the security is called the issuer. §The definition of ‘Securities’ as per the Securities Contracts Regulation Act (SCRA), 1956, includes instruments such as shares, bonds, scrips, stocks or other marketable securities of similar nature in or of any incorporate company or body corporate, government securities, derivatives of securities, units of collective investment scheme, interest and rights in securities, security receipt or any other instruments so declared by the Central Government.

Classification of Securities Security

Debt

Equity

•Bond •Common Stock •Debenture •Preferred Stock •Notes •Collective Investment •Commercial Paper

Derivati ves •Futures •Forwards •Options •Swaps

Debt Securities The holder of a debt security is typically entitled to the payment of principal and interest, together with other contractual rights under the terms of the issue, such as the right to receive certain information. Debt securities are generally issued for a fixed term and redeemable by the issuer at the end of that term. Debt securities may be protected by collateral or may be unsecured.

•Bond: is a debt security, in which the authorized issuer owes the holders a debt and is obliged to repay the principal and interest (the coupon) at a later date, termed maturity. A bond is simply a loan in the form of a security with different terminology. •Debenture is a long-term debt instrument used by governments and large companies to obtain funds. It is defined as "a debt secured only by the debtor’s earning power, not by a lien on any specific asset. •Notes and Commercial paper : are debt securities with a maturity of less than 1 year. Notes have a shorter maturity. Commercial paper is a simple form of debt security that essentially represents a post-dated check with a maturity of not more than 270 days.

Equity Securities An equity security is a share in the capital stock of a company (typically common stock, although preferred equity is also a form of capital stock). The holder of an equity is a shareholder, owning a share, or fractional part of the issuer. equity generally entitles the holder to a pro rata portion of control of the company, meaning that a holder of a majority of the equity is usually entitled to control the issuer. Equity also enjoys the right to profits and capital gain, whereas holders of debt securities receive only interest and repayment of principal regardless of how well the issuer performs financially.

•Common Stock : All corporations issue a stock that has the last claim on the corporation’s assets. It is the first security to be issued and the last to be retired. Common stock represents the chief ownership of a corporation and usually is the only issue that has a vote in managing the corporation. •Preferred Stock : This type of stock usually does not have any voting rights and is often retired after a certain period of time, usually about 10 years. The “preference” comes in that these shares are entitled to dividend payments or claims on assets in the case of bankruptcy before any payment to the common stock holders, but still only after all bondholders have been paid. •Collective investment scheme: is a way of investing money with other people to participate in a wider range of investments than those feasible for most individual investors, and to share the costs of doing so. Mutual fund is a professionally managed firm of collective investments that collects money from many investors and puts it in stocks, bonds, short-term money market instruments, and/or other securities.

Derivatives Derivatives are financial instruments whose value changes in response to the changes in underlying variables. These securities are direct obligations or investments. Everything else is derived from one of these instruments. Derivatives can be based on different types of assets such as commodities, equities (stocks), bonds, interest rates, exchange rates, or indexes .

Forwar ds A forward contract is a customized contract between two entities, where settlement takes place on a specific date in the future at today’s pre-agreed price.

Future s

Option s

A futures contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Futures contracts are special types of forward contracts in the sense that the former are standardized exchange-traded contracts, such as futures of the Nifty index.

An Option is a contract which gives the right, but not an obligation, to buy or sell the underlying at a stated date and at a stated price. Options are of two types - Calls and Puts options

Swaps Swaps are contracts whereby two parties agree to make periodic payments to each other. For example, an interest rate swap would involve one party paying interest at a fixed rate, while the other party to the contract would pay interest at a floating rate (such as the prime rate in effect at

Regulator Why does Securities Market need Regulators? The absence of conditions of perfect competition in the securities market makes the role of the Regulator extremely important. The regulator ensures that the market participants behave in a desired manner so that securities market continues to be a major source of finance for corporate and government and the interest of investors are protected. Who regulates the Securities Market? The responsibility for regulating the securities market is shared by

The Securities and Exchange Board of India (SEBI) is the regulatory authority in India established under Section 3 of SEBI Act, 1992. In particular, it has powers for: •Regulating the business in stock exchanges and any other securities markets •Registering and regulating the working of stock brokers, sub–brokers etc. •Promoting and regulating selfregulatory organizations •Prohibiting fraudulent and unfair trade practices •Calling for information from, undertaking inspection, conducting inquiries and audits of the stock exchanges, intermediaries, self – regulatory organizations, mutual funds and other persons associated with the