What is Securities Market?
Securities market help in transfer of resources from those with idle resources to others who have a productive need for them. To state formally, securities markets provide channels for allocation of savings to investments and thereby decouple these two activities.
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As a result, the savers and investors are not constrained by their individual abilities, but by the economy’s abilities to invest and save respectively, which inevitably enhances savings and investment in the economy.
A financial market consists of investors (buyers of securities), users of funds (sellers of securities), intermediaries and regulatory bodies.
Securities Market
The securities market has two interdependent and inseparable segments, the new issuers (the primary market) and stock (secondary) market.
Primary Market
The Primary Market is used by issuers for raising fresh capital from the investors by making initial public offers or rights issues or offers for sale of equity or debt. The primary market is also known as the new issues market.
Thus, in the primary market, the issuer has direct contact with the investor, while in the secondary market, the dealings are between two investors and the issuer does not come into the picture.
The resources in the primary market can be raised either through the private placement route or through the public issue route by way of Initial Public Offer (IPO) or Follow on Public Offer (FPO). It is a public issue, if anybody and everybody can subscribe for it, whereas, if the issue is made to select group of people then it is termed as private placement.
Secondary Market
Secondary market provides liquidity to these instruments, through trading and settlement on the stock exchanges. An active secondary market promotes the growth of the primary market and capital formation, since the investors in the primary market are assured of a continuous market where they have an option to liquidate their investments.
The secondary market is also known as the stock market or stock exchange. It is a market for the purchase and sale of existing securities. It helps existing investors to disinvest and fresh investors to enter the market.
The secondary market on the other hand operates through two mediums, namely, the Over-The-Counter (OTC) market and the Exchange Traded Market. OTC markets are the informal type of markets where trades are negotiated. In this type of market, the securities are traded and settled bilaterally over the counter.
Indian markets have recognized OTC exchanges like the OTCEI, however they do not give much volumes. The other option of trading is through the stock exchange route, where trading and settlement is done through the stock exchanges and the buyers and sellers don’t know each other. The settlements of trades are done as per a fixed time schedule.
Money Markets
Money market is a market for financial assets that are close substitutes for money. It is a market for short term funds and instruments having a maturity period of one or less than one year. Money market provides short term debt financing and investment.
The money market deals primarily in short-term debt securities and investments, such as banker’s acceptances, negotiable certificates of deposit (CDs), repos and Treasury Bills (T-bills), call/notice money market, commercial papers. Government securities are also a part of the money market.
The major participants in the market are the Reserve Bank of India (RBI), Commercial Banks, Non-Banking Finance Companies, State Governments, Large Corporate Houses and Mutual Funds.
Products Traded in the Indian Market
The investors in the Indian securities market have a wide choice of product base to choose depending upon a person’s risk appetite and needs. Broadly, however the products available can be categorized as Debt and Equity.
We here discuss the different products available in the different types of market in India.
Equity Markets and its Products
The equity segment of the stock exchange allows trading in shares, debentures, warrants, mutual funds and exchange traded funds (ETFs).
Equity Shares represents the form of fractional ownership in a business venture. Equity
shareholders collectively own the company. They bear the risk and enjoy the rewards of
ownership.
Debentures
Debentures are instruments for raising long term debt. Debentures in India are typically secured by tangible assets. There are fully convertible, non-convertible and partly convertible debentures. . Fully convertible debentures will be converted into ordinary shares of the same company under specified terms and conditions.
Partly convertible debentures (PCDs) will be partly converted into ordinary shares of the same company under specified terms and conditions. Thus it has features of both debenture as well as equity. Non Convertible Debentures (NCDs) are pure debt instruments without a feature of conversion.
The NCDs are repayable on maturity. Partly Convertible debentures have features of convertible and non-convertible debentures. Thus, debentures can be pure debt or quasiequity, as the case may be.
Warrants
Warrants entitle an investor to buy equity shares after a specified time period at a given price.Warrants are a type of financial instrument that entitle the holder to purchase a specific number of shares of stock at a predetermined price, known as the exercise price, within a certain time period, typically several years.
This exercise price is often set at a premium to the current market price at the time of issuance. Warrants are generally issued as a component of a larger security offering, such as a bond or preferred stock offering, and are typically traded on exchanges in a manner similar to options.
Mutual Funds
Mutual Funds are investment vehicles where people with similar investment objective come together to pool their money and then invest accordingly. A mutual fund company pools money from many investors and invests the money in stocks, bonds, short-term money-market instruments, other securities or assets, or some combination of these investments, depending on the objectives of the fund.
Exchange Traded Fund
Exchange Traded Fund is a fund that can invest in either all of the securities or a representative sample of securities included in the index. Importantly, the ETFs offer a one-stop exposure to a diversified basket of securities that can be traded in real time like individual stock.
Derivative Market and its Products
Derivative
Derivative is a product whose value is derived from the value of one or more basic variables, called bases (underlying asset, index, or reference rate), in a contractual manner. The underlying asset can be equity, forex, commodity or any other asset.
The derivatives segment in India allows trading in the equities, currency, commodities. There are two types of derivatives instruments viz., Futures and Options that are traded on the Indian stock exchanges.
Index/Stock Future
Index/Stock Future 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. Futures contracts are available on certain specified stocks and indices.
Index / Stock Options
Index / Stock Options are of two types – calls and puts. Calls give the buyer the right, but not the obligation, to buy a given quantity of the underlying asset, at a given price on or before a given future date. Puts give the buyer the right, but not the obligation, to sell a given quantity of the underlying asset at a given price on or before a given date.
Currency Derivatives
Currency Derivatives trading was introduced in the Indian financial markets with the launch of currency futures trading in the USD-INR pair at the National Stock Exchange of India Limited on August 29, 2008. Few more currency pairs have also been introduced thereafter.
It was subsequently introduced in the BSE on October 1, 2008, and MCX, On October 7, 2008. As at end October 2010, currency futures are traded on the USD-INR, GBPINR, EUR-INR and JPY-INR at the NSE.
Commodity Derivatives
Commodity Derivatives markets are markets where raw or primary products are exchanged. These raw commodities are traded on regulated commodities exchanges, in which they are bought and sold in standardized contracts for a specified future date. Commodity markets facilitate the trading of commodities such as gold, silver and agricultural goods.
Interest Rate Futures
Interest Rate Futures trading is based on notional 10 year coupon bearing GOI security. These contracts are settled by physical delivery of deliverable grade securities using electronic book entry system of the existing depository’s viz., NSDL and CDSL and the Public Debt Office of the Reserve Bank unlike the cash settlement of the other derivative products.
Debt Market and its Products
Debt market consists of Bond markets, which provide financing through the issuance of Bonds, and enable the subsequent trading thereof. Instruments like bonds/debentures are traded in this market. These instruments can be traded in OTC or Exchange traded markets. In India, the debt market is broadly divided into two parts government securities (GSec) market and the corporate bond market.
Government Securities Market
The Government needs enormous amount of money to perform various functions such as maintaining law and order, justice, national defence, central banking, creation of physical infrastructure.
For this it generates revenue by various ways including borrowing from banks and other financial institutions. One of the important sources of borrowing funds is the government securities market.The government raises short term and long term funds by issuing securities.
These securities do not carry default risk as the government guarantees the payment of interest and the repayment of principal. They are therefore referred to as gilt edged securities. Government securities are issued by the central government, state government and semi government authorities.
Corporate Bond Market
Corporate bonds are bonds issued by firms and are issued to meet needs for expansion, modernization, restructuring operations, mergers and acquisitions. The corporate debt market is a market wherein debt securities of corporates are issued and traded therein.
The investors in this market are banks, financial institutions, insurance companies, mutual funds, FIIs etc. Corporates adopt either the public offering route or the private placement route for issuing debentures/bonds.
FAQ
What is Securities Market?
Securities market help in transfer of resources from those with idle resources to others who have a productive need for them. To state formally, securities markets provide channels for allocation of savings to investments and thereby decouple these two activities.
What is Money Markets?
Money market is a market for financial assets that are close substitutes for money. It is a market for short term funds and instruments having a maturity period of one or less than one year. Money market provides short term debt financing and investment.