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Concept of Securities and Kinds

of Securities
Presented by-:

Name-Yashasvi Verma Name- Yashu Singhal

Roll no.- 07813403816 Roll no.-36113403816
•Concept of securities
i. Introduction
ii. Meaning of securities
iii. Regulatory Framework to Govern
Securities in India
iv. Functions of securities
v. Securities and Their Effect on the Economy
Kinds of Securities
 Debt Security
◦ Characterstics of Debt Securities
◦ Kinds of Debt Securities
 Corporate Bonds
 Government Bonds
 Municipal Bonds

 Equity security
◦ Kinds of Equity security
 Stocks
 Shares
◦ Are Mutual Funds considered as Equity Security

 Difference between Equity and Debt security

 Derivative Security
◦ Kinds of derivative security
 Forward contracts
 Future contracts
 Swap contracts
 Option contracts
Concept of Securities
• A security is a financial instrument that represents an ownership
position in a publicly-traded corporation (stock ), a creditor
relationship with governmental body or a corporation ( bond),
or rights to ownership as represented by an option. A security is a
fungible , negotiable financial instrument that represents some type of
financial value.
• Securities include shares of corporate stock or mutual funds,
corporation or government issued bonds, stock options or other
options , limited partnership units, and various other formal
investment instruments.
• Any financial instrument which are tradable or that can be brought
and sold are generally referred to as securities.
• The company or other entity issuing the security is called
the issuer . A country and regulatory structure determines what
qualifies as a security.
• It should be transferable.
• securities are documents that merely represent an
interest or a right to something else; they are not
consumed or used the same way as traditional
consumer goods.
According to ARTICLE- 366(26) of the constitution :-
“Securities” include stock.


Under the companies act, 2013
SECTION -2(81) – “SECURITIES” means the securities
as defined in clause (h) of section-2 of the securities
contract (regulation) act, 1956.
Under securities contract (regulation) act, 1956
SECTION-2(h) :- “securities” include-
(i) shares, scrips, stocks, bonds, debentures, debenture stock or other
marketable securities of a like nature in or of any incorporated company
or other body corporate;
(ia) derivative
(ib) units or any other instrument issued by any collective
investment scheme to the investors in such schemes;
(ic) security receipt as defined in clause (zg) of section 2 of the
Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 (54 of 2002);
(id) units or any other such instrument issued to the investors
under any mutual fund scheme;
(ie) any certificate or instrument (by whatever name called),
issued to an investor by any issuer being a special purpose distinct entity
which possesses any debt or receivable, including mortgage debt, assigned
to such entity, and acknowledging beneficial interest of such investor in
such debt or receivable including mortgage debt, as the case may be;
(ii) Government securities;
(iia) such other instruments as may be declared by the Central
Government to be securities; and
(iii) rights or interests in securities;
Under the forward contract (regulation) act, 1952
“Securities” include shares , scrips, stocks , bonds ,
debentures , debentures-stock or other marketable
securities of a like nature in or of any incorporated
company or other body corporate and also
government securities.

• However , certain instrument like mutual fund

policies are non-transferable, notwithstanding the fact
that some of them can be brought and sold on the
exchange plateform (category known as a exchange
traded funds)
What is “marketable security of like nature” ?
Dahiben unedbhai patel
Norman james hamilton (1985)
 The use of these words in section-2(h)(i) of securities
contract (regulation) act, 1956 clearly intended to mean
that earlier categories of securities had to be
marketable and any other securities of like nature.
 “marketable” :- is stated to mean-
“fit to be offered for sale in a market ;
being such as may be justly or lawfully
sold or brought”
Bhagwati developers pvt. Ltd.
peerless general finance and investment co. ltd. And anr.

Sc in the context of determining the scope of the term

“marketable” in definition of securities under the securities
contract (regulation) act, 1956 observed –
what is required is free transferability. However, when the statute
prohibits or limits transfer of shares to a specified category of
people with onerous condition or restriction , right of
shareholders to transfer or the free transferability is jeopardized
and in that case those share with these limitation cannot be said to
be marketable.
 This means that the instrument “share” can be treated as security
or not depending on various other factors.
 For instance , shares issued by private companies would not be
treated as “securities” in India because the companies act , 2013
provides that the private companies can restricts the right to
transfer its share
 According to section 23 of the companies act ,2013-
(1) A public company may issue securities -
(a) through prospectus
(b) through private placement
(c) through a right issue or a bonus
(2) A private company may issue securities-
(a) through right issue or bonus issue
(b) through private placement
Regulatory framework to govern
securities in India
i. The securities contract (regulation)
ii. The securities and exchange board of
India, 1992
iii. The depositories act, 1996
iv. The companies act, 2013
Function of securities
 Generally, securities represent an investment and a means by
which companies and other commercial enterprises can
raise new capital. Companies can generate capital through
investors who purchase securities upon initial issuance.
depending on an institutions and market demand
or pricing structure, raising capital through securities can be
a preferred alternative to financing through a bank loan. In
the other hand, purchasing securities with borrowed money,
an act known as buying on a margin, is a popular
investment technique.
 In essence, a company may deliver property rights, in the
form of cash or other securities, either at inception or in
default, to pay its debt or other obligation to another entity.
These collateral arrangements have seen growth especially
among institutional investors.
Securities and their effect on the
 Securities are investments traded on a secondary
market. The most well-known examples include
stocks and bonds. Securities allow you to own the
underlying asset without taking possession.
 For this reason, securities are readily traded. That
means they’re liquid. They are easy to price, and
so are excellent indicators of the underlying value
of the assets.
 Traders must be licensed to buy and sell
securities to assure they are trained to follow the
laws set by the Securities and Exchange
Kinds of Securities
Kinds of Securities
 There are many different securities that you can invest your money
in.They are usually divided into two categories debts and equities.
 A debt security represents money that is borrowed and must be
repaid, with terms that define the amount borrowed, interest rate
and maturity/renewal date.
 Equities represent ownership interest held by shareholders
in a corporation, such as a stock. Unlike holders of debt
securities who generally receive only interest and the
repayment the principal, holders of equity securities are able
to profit from capital grains.
Debt Security

 Debt securities are usually fixed term securities redeemable at the

end of the term, they may be secured or unsecured or protected
by collateral.
 Debt securities may offer some control to investors if the company
is a start-up or an established business undergoing ‘restructuring’.
 In these cases, if interest payments are missed, the creditors may
take control of the company and liquidate it to recover some of
their investment.
 People favor buying debt securities because of the usually higher
rate of return than bank deposits.
Characterstics of Debt Securities
 They are made by way of transferable instrument.
 They bear interest or are issued at a discount to their face value.
 They must be redeemed by the issuer on a specified redemption date or in
installments, although some debt securities are issued without a fixed
redemption date.

 They can be either:

◦ unsecured and rank parry passu with the issuer’s other unsecured debt,
◦ secured on specified assets, and

 They can be either:

◦ full recourse, which means that holders of the securities have a claim on
the general assets of the issuer, or
◦ limited recourse, which means that the claims of holders of the
securities are limited to specified assets of the issuer
Types of debt securities
 Corporate bonds-
A corporate bond is a debt instrument issued by a company. It is a loan
to the company when you invest in a bond.You are entitled to receive
interest each year on the loan until it’s paid off. Bonds are safer and
more stable than stocks.You are guaranteed a steady income from
bonds. However, bond holders aren’t entitled to dividends or voting
rights. In addition, stockholders have potential for greater returns in
the long run

 Government bonds-
Government bonds are issued by the US federal government. The
most common are US Treasury bonds. They’re issued to help finance
the national debt.

Government bonds have very low investment risk. In fact, they’re

virtually risk-free since they’re guaranteed by the US government.
However, the potential return is lower than stocks and corporate

 Municipal bonds
Municipal bonds are debt securities from states and local government
entities.These local entities include counties, cities, towns and school
districts. The interest income you earn on the municipal bonds is
usually exempt from federal income taxes. It may also be exempt from
state and local income taxes if you live where the bonds are issued.
However, the interest rate is usually lower than corporate bonds.
Equity Security

 Common stock is the most popular type of equity security.

 Investors are called shareholders and they own a share of the

equity interest of capital stock of a company, trust or partnership.

 It is like saying someone who invests in equity securities is buying a

tiny part of a company.
Types of Equity Security
 Stocks-
◦ Stocks are the best known equity security.You’re purchasing an ownership
interest in a company when you buy stock.You’re entitled to a portion of
company profits and sometimes shareholder voting rights .
◦ Stock prices can fluctuate greatly. Investors try to buy stock when the price
is low and sell it when the price is high. Stock has a higher investment risk
than most other securities. There is no guarantee that you won’t lose money.
However, stock usually has the potential for the greatest returns.
◦ Most stock is considered as a common stock. Preferred stock normally
offers dividends but not voting rights. Common stock holders also have
greater potential for higher returns.

 Shares-
A share is an equity security. its owner owns one part of the capital of the
company which has issued the shares in question. The shares enable the
shareholder the right to take part in the decision-making in the company. If
the latter operates with profit, the owners of shares may receive dividends.
The amount of the dividend is decided upon by the shareholders at a
General Meeting of the Shareholders.
Are Mutual Funds Considered as
Equity Security
 Mutual funds are simply companies that allow many investors to
leverage their combined funds to produce greater gains all around.
Individuals purchase shares of the fund, which uses that money to
invest in a diverse range of stocks, Bonds, Treasury bills or other
highly liquid assets. Shareholders are entitled to a portion of the
profits commensurate with their financial interest in the fund.

 Like stocks, mutual funds are considered equity securities because

investors purchase shares that correlate to an ownership stake in
the fund as a whole.
Difference between Equity and
Debt security
 Equity securities represent a claim on the earnings and assets of a
corporation, while debt securities are investments into debt
instruments. For example, a stock is an equity security, while a bond
is a debt security.
 When an investor buys a corporate bond, he is essentially loaning
the corporation money, and he has the right to be repaid the
principal and interest on the bond. In contrast, when someone buys
a stock from a corporation, he essentially buys a piece of the
 If the company profits, he profits as well, but if the company loses
money, his stock also loses money. In the event that the
corporation goes bankrupt, it pays bondholders before
Derivative Security
 A derivative is a financial security with a value that is reliant upon,
or derived from, an underlying asset or group of assets. The
derivative itself is a contract between two or more parties, and its
price is determined by fluctuations in the underlying asset. The
most common underlying assets include stocks, bonds,
commodities, currencies, interest rates and market indexes.
 Derivatives can either be traded over-the-counter (OTC) or on an
exchange. OTC derivatives constitute the greater proportion of
derivatives and are not standardized. Meanwhile, derivatives traded
on exchanges are standardized and more heavily regulated. OTC
derivatives generally have greater counterparty risk than
standardized derivatives.
Kinds of Derivative Security
Many investors use derivative securities as a way to hedge their
investment portfolios against certain risk. A derivative security
derives its value from another underlying financial security.
Derivative securities come in several types, including forward,
future, swap and option contracts.
 Forward contracts
A forward contract is an agreement in which a seller promises to
deliver a predetermined quantity of an asset at a certain date and
price to a buyer. The price of a forward contract is determined at
the initial trade date although the asset is delivered in the future.
Most forward contracts are private agreements and are not traded
on exchanges. For example, a farmer may enter into a forward
contract to lock in the price of wheat if he believes that price will
rise in the future.
 Future contracts
Similar to a forward contract, a futures contract represents an
agreement for a seller to deliver goods at a specified time for a
predetermined price. Unlike a forward contract, future contracts are
standardized, traded on exchanges and created by a clearinghouse that
acts a middleman between the seller and buyer. The benefit of the
clearinghouse is that the risk of default is eliminated. The parties of
futures contracts are required to post margin, which the brokerage
firm uses as collateral.

 Swap contracts
A swap is a type of derivative security in which investors swap one set
of cash flow for another set of cash flow. A currency swap is a
common type of swap in which parties enter a contract to exchange
streams of cash flow denominated in two currencies. Another
common type of swap is an interest rate swap, which is an
agreement where one stream of future interest rate payments is
exchanged for another party’s fixed cash flows.
 Option contracts
Two types of option contracts exist – call options and put options.
Investors purchase a call option to buy a stock at a specified price
and date, and a put option allows investors to sell a stock at
specified price and date.
Investors of call options realize a profit if the price of the
underlying asset rises from the time the contract is initiated. Put
option investors profit when the price declines. Option investors
are not obligated to buy the underlying asset at the contract’s
expiration date.