2. Introduction to Securities Market

Table of Contents

Introduction to Securities and Securities Market

The securities market is where securities are traded, bought, and sold by investors. It is a platform for companies and governments to raise capital and for investors to buy and sell securities for investment purposes.

 

Product Definitions/Terminology-

Instrument Description Regulator
Equity share The amount of money that shareholders have invested in a company. It is represented by shares of stock that can be bought and sold in the stock market. Equity shareholders are the owners of a company and have the right to vote on certain matters, such as electing members of the Board of Directors. They also receive dividends, which are payments made out of the profits of the company. SEBI & Companies Act
Debentures A form of long-term debt, usually issued by companies to raise capital. They are usually secured against the assets of the company and are repaid in periodic installments with interest. Debentures can be traded on the stock market and provide investors with a regular income. However, they do not carry any voting rights, unlike equity shareholders. RBI, SEBI & Companies Act
Fully convertible debentures (FCDs) A type of debt instrument that can be exchanged for a fixed number of equity shares of the issuing company at a predetermined price. The conversion is usually done at a predetermined date, usually after a certain period of time. FCDs are a form of hybrid security, as they combine the features of both debt and equity. RBI, SEBI & Companies Act
Partly convertible debentures (PCDs) A type of debt instrument that can be partially converted into equity shares of the issuing company at a predetermined price. RBI, SEBI & Companies Act
Non-Convertible Debentures (NCDs) Pure debt instruments without a feature of conversion. The NCDs are repayable/redeemable on maturity. RBI, SEBI & Companies Act
Foreign currency bonds Bonds issued by a company in a currency that is different from the currency of its home country. Regulators in the respective country of issue
External bonds / Masala bonds Bonds issued in a currency that is different from the currency of the country in which it is issued. Regulators in the respective country of issue
Warrants and Convertible Warrants Options that entitle an investor to buy equity shares of the issuer company after a specified time period at a predetermined price. SEBI & Companies Act
Indices A market index tracks the market movement by using the prices of a small number of shares chosen as a representative sample. we can call the stock market index a benchmark and it presents the economy of the country and specific sector. SEBI & RBI
Mutual Funds (MFs) Mutual Funds are investment vehicles that pool together the money contributed by investors the fund invests in a portfolio of securities that reflect the common investment objectives of the investors. Each investor’s share is represented by the units issued by the fund. The value of the units, called the Net Asset Value (NAV), changes continuously to reflect changes in the value of the portfolio held by the fund. SEBI & RBI
Exchange Traded Funds (ETFs) Exchange Traded Funds are investment vehicle that invests funds pooled by investors to track an index, a commodity, or a basket of assets. It is similar to an index fund in the sense that its portfolio reflects the index it tracks. But, unlike an index fund, the units of the ETF are listed and traded in Demat form on a stock exchange, and their price changes continuously to reflect changes in the index or commodity prices. SEBI & RBI
Preference Shares Preference Shares are a special kind of equity shares that have preference over common/ordinary equity shares at the time of dividend and at the time of repayment of capital in the event of winding up of the company. They have some features of equity and some features of debt instruments. N/A
Depository Receipts (DRs) Depository Receipts are financial instruments that represent shares of a foreign company. These depositary receipts trade in the local market (in which it is issued) and are denominated in local currency. N/A
Foreign Currency Convertible Bonds (FCCBs) Denominated convertible debt papers issued by companies in international markets. These instruments are to be understood the way convertibles are with the only difference being that they are generally optionally convertible and issued offshore in different denominations under guidelines as defined by the Reserve Bank of India (RBI) from time to time. Foreign Exchange Management Act (FEMA) & RBI
Equity Linked Debentures (ELDs) Floating rate debt instruments whose interest is based on the returns of the underlying equity asset such as Nifty 50, S&P Sensex, individual stocks, or any customized basket of individual stocks. N/A
Commodity Linked Debentures (CLDs) Floating-rate debt instruments whose interest is based on the returns of the underlying commodity asset. N/A
Mortgage Backed Securities (MBS) and Asset-Backed Securities (ABS) Debt instruments issued by institutions against the receivables and cash flows from financial assets such as home loans (MBS), auto loans, rent receivable, credit card receivables, and others. N/A
REITs/InvITs Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs) are investment vehicles that pool money from various investors and invest in revenue-generating real estate projects and infrastructure projects, respectively. Regulation by the Securities and Exchange Board of India (SEBI)
Commodities Largely traded goods that are meant for use in the production of goods or for consumption. Since inflation and prices of commodities are directly related, investing in commodities can help protect the real value of the investment. N/A
Precious Metals Investment that can help preserve the real value of money. N/A
Commodity ETFs An exchange-traded fund that invests the pooled investment in a range of physical commodities. N/A
Managed Futures Contract A futures contract is a contract to buy or sell an asset at a specified future date at a specific price. N/A
Warehouse Receipts A document that shows proof of ownership of goods that are stored in a warehouse. Most of these warehouse receipts are negotiable. Thus, the title to the underlying goods can be transferred by simply transferring the receipts. N/A
Primary Market Issuers raise capital by issuing securities to investors. Fresh securities are issued in this market. SEBI
Secondary Market Facilitates trades in already-issued securities, enabling investors to buy or sell existing securities. SEBI
Public Issue Securities are issued to the members of the public, and anyone eligible to invest can participate in the issue. This is primarily a retail issue of securities. SEBI
Initial Public Offer (IPO) The first sale of a corporate's common shares to investors at large to raise equity capital for further growth of the business. SEBI
Follow-on Public Offer (FPO) An already listed company makes either a fresh issue of securities to the public or an offer for sale to the public. SEBI
Private Placement Issuing large quantities of shares to a select set of investors. Companies Act 2013
Qualified Institutional Placements (QIPs) Private placements of shares made by a listed company to certain identified categories of investors known as Qualified Institutional Buyers (QIBs). SEBI
Preferential Issue An issue of specified securities by a listed issuer to any select person or group of persons on a private placement basis. SEBI
Rights and Bonus Issues Securities are issued to existing shareholders of the company as on a specific cut-off date, enabling them to buy more securities at a specific price (in case of rights) or without any consideration (in case of bonus). Companies Act 2013
Onshore and Offshore Offerings If capital is raised from the domestic market, it is called an onshore offering and if capital is raised from investors outside the country, it is termed an offshore offering. SEBI
Offer for Sale (OFS) A form of share sale where the shares offered in an IPO or FPO are not fresh shares issued by the company, but an offer by existing shareholders to sell shares that have already been allotted to them. SEBI
Sweat Equity Shares issued by a company to its employees, promoters, technocrats, or others as a reward for their contribution to the company Companies Act, 2013
Employee Stock Option Scheme (ESOPs) Instruments given by a company to its employees that give them the option to buy the shares of the company at a pre-determined price after a vesting period Companies Act, 2013
Secondary Market Market where trades in already-issued securities take place between investors, without the involvement of the issuer SEBI
Over-The-Counter Market (OTC Market) Market where trades are directly negotiated between two or more counterparties, with securities traded and settled over the counter among the counterparties directly SEBI
Exchange Traded Markets Market where trading and settlement of securities are done through stock exchanges, with trades executed on the exchange settled through a clearing corporation SEBI
Trading A formal contract to buy/sell securities SEBI
Clearing and Settlement Post-trading activities that constitute the core part of the equity trade life cycle, with clearing ascertaining the net obligations of buyers and sellers and settlement being the next step in settling obligations by delivering shares (by the seller) and paying money (by the buyer) SEBI
Risk Management Process of managing credit risk in transactions, with counterparties in OTC transactions expected to take care of credit risk on their own, and the clearing corporation giving a settlement guarantee of trades to counterparties in exchange-traded markets SEBI
Stock Exchanges Trading platform where buyers and sellers can transact in already issued securities, with trading happening through electronic trading terminals featuring anonymous order matching SEBI
Depositories Institutions that hold securities of investors in electronic form, with two depositories in India registered with SEBI: Central Depository Services Limited (CDSL) and National Securities Depository Limited (NSDL) SEBI
Sweat Equity Under Sec.54 of the Companies Act, 2013, a company may issue shares to its employees, promoters, technocrats, or others as a reward for their contribution to the company. These shares are referred to as sweat equity. Companies Act, 2013
Employee Stock Option Scheme (ESOPs) ESOPs are instruments given by a company to its employees that give them the option to buy the shares of the company at a pre-determined price after a period of time (referred to as a vesting period). Companies Act, 2013
Secondary Market The dealings between investors and the issuers do not come into the picture. SEBI
Over-The-Counter Market (OTC Market) OTC markets are the markets where trades are directly negotiated between two or more counterparties. In this type of market, the securities are traded and settled over the counter among the counterparties directly. SEBI
Exchange Traded Markets Trading and settlement are done through the stock exchanges. The trades executed on the exchange are settled through the clearing corporation, which acts as a counterparty and guarantees the settlement of the trades to both buyers and sellers. SEBI
Trading A formal contract to buy/sell securities is termed as trading. SEBI
Clearing and Settlement Are post-trading activities that constitute the core part of the equity trade life cycle. Clearing activity is all about ascertaining the net obligations of buyers and sellers for a specific time period. And, settlement is the next step in settling obligations by delivering shares (by the seller) and paying money (by the buyer). SEBI
Risk Management In OTC transactions, counterparties are expected to take care of the credit risk on their own. In the exchange-traded world, the clearing corporation, as defined above, gives a settlement guarantee of trades to the counterparties (all buyers and sellers). SEBI
Stock Exchanges Provide a trading platform where buyers and sellers can transact in already issued securities. Stock markets such as NSE, BSE and MSEI are nationwide exchanges. Trading happens on these exchanges through electronic trading terminals which feature anonymous order matching. SEBI
Depositories Are institutions that hold securities (like shares, debentures, etc.) of investors in electronic form. Two depositories operate in India, namely NSDL and CDSL. The depositories provide various services such as dematerialization of securities, rematerialization of securities, electronic settlement of trades, etc. SEBI
Depository Participant Agent of the depository through which it interfaces with the investors and provides depository services Securities and Exchange Board of India (SEBI) and Depositories
Trading Members (Broker) Registered members of a Stock Exchange who facilitate buy and sell transactions of investors on stock exchanges Securities and Exchange Board of India (SEBI) and Stock Exchanges
Sub-Broker Entity that acts on behalf of a trading member or stock broker as an agent for assisting investors in buying, selling, or dealing in securities Securities and Exchange Board of India (SEBI) and Stock Exchanges
Authorized Person Any person (individual, partnership firm, LLP, or body corporate) who is appointed by a stock broker or trading member as an agent to reach out to investors scattered across the country Securities and Exchange Board of India (SEBI) and Stock Exchanges
Custodians Entity that is charged with the responsibility of holding funds and securities of its large clients and settling transactions in these securities Securities and Exchange Board of India (SEBI)
Clearing Corporations Play an important role in safeguarding the interest of investors in the Securities Market and ensure that members of the Stock Exchange meet their obligations to deliver funds or securities Securities and Exchange Board of India (SEBI) and Clearing Corporations
Clearing Banks Act as an important intermediary between clearing members and the clearing corporation and every clearing member needs to maintain an account with the clearing bank Securities and Exchange Board of India (SEBI) and Clearing Banks
Merchant Bankers Entities registered with SEBI and act as issue managers, investment bankers, or lead managers. They help issuer access the security market with the issuance of securities. SEBI
Underwriters Intermediaries in the primary market who undertake to subscribe to any portion of a public offer of securities that may not be bought by investors. SEBI
Foreign Portfolio Investors (FPIs) An entity established or incorporated outside India that proposes to make investments in India. These international investors must register with the regulator - the Securities and Exchange Board of India (SEBI) to participate in the Indian Securities Market. SEBI
Participatory Notes (P-Notes or PNs) Instruments issued by SEBI-registered foreign portfolio investors to overseas investors, who wish to invest in the Indian stock markets without registering themselves with the market regulator. SEBI
Insurance Companies Core business is to ensure assets. Depending on the type of assets that are insured, there are various insurance companies like life insurance and general insurance, etc. These companies have huge corpus and they are one of the most important investors in the Indian economy by investing in equity investments, government securities, and other bonds. IRDAI
Pension Funds A fund established to facilitate and organize the investment of the retirement funds contributed by the employees and employers or even only the employees in some cases. The pension fund is a common asset pool meant to generate stable growth over the long term and provides a retirement income for employees. PFRDA
Venture Capital Funds (VC) Pools of capital provided by investors to startup companies and small businesses with perceived long-term growth potential. The venture capital funds provide financing to these companies in exchange for equity or an ownership stake in the business. These funds typically focus on high-growth, high-risk investments in exchange for the potential for a high return. Venture capital funds are typically managed by professional investors and are typically structured as limited partnerships. SEBI
Private Equity Firms Funding available to companies in the early stages of growth, expansion, or buy-outs SEBI
Hedge Funds Investment vehicle that pools capital from a number of investors and invests that across assets, across products, and across geographies SEBI
Alternative Investment Funds (AIF) Funds that invest in non-traditional asset classes such as private equity, venture capital, hedge funds, real estate, commodities, and derivatives SEBI
Investment advisers Work with investors to help them decide on asset allocation and make a choice of investments based on an assessment of their needs, time horizon return expectation, and ability to bear risk SEBI
Employee Provident Fund (EPF) A scheme that is used to provide retirement benefits in the form of defined benefit schemes to employees of covered organizations EPFO
National Pension Scheme (NPS) A government-sponsored retirement scheme where subscribers contribute regularly to the scheme and on maturity, the funds accumulated in the scheme can be used to buy annuity products PFRDA
Family Offices Handles the wealth of a wealthy family including investments, estate planning, and tax planning None
Corporate Treasuries Handle investments of surplus funds for companies and other business organizations None
Retail Participants Individual investors who buy and sell securities for their personal account, and not for another company or organization SEBI
Proxy Advisory services firms Advise investors in relation to the exercise of their rights in the company including recommendations on public offers or voting recommendations on agenda items. Regulated by the Securities and Exchange Board of India (SEBI)
Spot trades Trades where settlement (payment and delivery) occurs on the spot date, which is normally two business days after the trade date (T+2). Regulated by the stock exchange on which the trade takes place.
Trading/Speculating An act of purchase or sale of an asset in the expectation of a gain from changes in the price of that asset over a short period of time. N/A
Hedging An act of taking a position in financial transactions to offset potential losses that may be incurred by another position. A hedge can be constructed from many types of financial instruments, including insurance, forward/futures contracts, swaps, options, etc. N/A
Arbitrage The simultaneous purchase and sale of an asset in an attempt to profit from discrepancies in its prices in two different markets. Buying a stock in the spot market and simultaneously selling that in the futures market to benefit from the price differential is an example of an arbitrage transaction. N/A
Pledge An act of taking a loan against securities by the investor. The investor is called a ‘pledgor’ and the entity who is giving the loan against the securities is called a ‘pledgee’. Securities held in a depository account can be pledged/ hypothecated to avail of a loan/credit facility. Securities and Exchange Board of India (SEBI)
Dematerialization The process of converting securities held in physical form into holdings in book entry (electronic) form. Depositories (NSDL and CDSL) in India
Rematerialization The reverse of dematerialization and is the process of converting securities held in electronic form into physical form. Depositories (NSDL and CDSL) in India

Mock-Test-

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NISM Series-XV: Research Analyst Certification

CHAPTER 2- INTRODUCTION TO SECURITIES MARKET

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1. Which entities hold securities in electronic form in the securities market?

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2. Which of the following is an example of an Institutional Investor in the securities market?

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3. What is the eligibility criterion for retail investors in an eligible public issue?

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4. Which category of Alternative Investment Funds (AIFs) invests in start-up or early-stage ventures?

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5. Which type of mutual fund scheme allows investors to buy and sell units at any time at the Net Asset Value (NAV) linked prices?

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6. Equity shares represent:

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7. What is the main difference between fully convertible debentures and non-convertible debentures?

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8. What is the distinguishing feature of masala bonds?

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9. What is the purpose of Participatory Notes (P-Notes) in the Indian stock market?

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10. What is the role of securities market?

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11. Which regulatory body is responsible for overseeing the issuance of warrants in India?

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12. Which type of bonds are issued by companies in a currency different from their home country?

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13. What is an Initial Public Offering (IPO)?

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14. What is the settlement period for spot trades in the securities market?

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15. What is the role of underwriters in the primary market?

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16. Convertible debentures can be converted into equity shares at a future date. Which type of convertible debentures involves the conversion of the entire face value into equity shares?

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17. Who facilitates buy and sell transactions of investors on stock exchanges?

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18. Which regulatory body is responsible for overseeing the issuance of equity shares in India?

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19. What is the role of clearing corporation in the secondary market?

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20. Which category of financial products are available in the Indian securities market?

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21. What does the term "securities" include as per the Securities Contracts (Regulation) Act, 1956?

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22. Along with SEBI (Securities and Exchange Board of Indi and other regulators under the Companies Act, does RBI (Reserve Bank of Indi also regulate the Equity Shares Market?

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23. What are the two segments of the secondary market?

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24. What is the purpose of the primary market?

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25. What is the role of Proxy Advisory services firms?

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26. Depository Receipts that are issued in India and listed on an Indian Stock Exchange, with foreign stocks as underlying shares, are known as:

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27. When the entire face value of a debenture is converted into equity shares, it is known as:

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28. What are foreign currency bonds?

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29. What is the purpose of market indices?

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30. Which of the following actions involves taking a position in financial transactions to offset potential losses incurred by another position?

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31. Which type of preference shares offers a pre-determined rate of dividend and has unpaid dividends carried forward?

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32. What is the advantage of Exchange Traded Funds (ETFs) over mutual fund schemes?

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33. Which market segment enables investors to exit from an investment or buy already existing securities?

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34. As per SCRA (Securities Contracts (Regulation) Act), which of the following is included in the term "securities"?

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35. What does an Offer for Sale (OFS) involve?

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36. What is the function of the secondary market?

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37. Which index is composed of the 30 chosen stocks on the Bombay Stock Exchange (BSE)?

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38. What is the process of converting securities held in physical form into holdings in electronic form called?

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39. Which regulatory body is responsible for overseeing Mutual Funds and Exchange Traded Funds in India?

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40. What is the distinguishing feature of partly convertible debentures (PCDs)?

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41. What are warrants?

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42. Which of the following entities issue securities?

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43. What are securities in the financial market?

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44. What are warrants in the context of the Indian Securities Market?

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45. Debentures are: