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

Derivati
Debt Equity
ves
•Bond •Futures
•Common Stock
•Debenture •Forwards
•Preferred Stock
•Notes •Options
•Collective Investment
•Commercial Paper •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 Future Option

ds s s
A forward contract is a A futures contract is an
customized contract agreement between two
between two entities, parties to buy or sell an
where settlement takes asset at a certain time in
place on a specific date the future at a certain
in the future at today’s price. Futures contracts
pre-agreed price. are special types of
forward contracts in the
sense that the former
are standardized
exchange-traded
contracts, such as futures
of the Nifty index.
Swaps
An Option is a contract Swaps are contracts
which gives the right, whereby two parties
but not an agree to make
obligation, to buy or sell periodic payments to
the underlying at a each other. For
stated date and at a example, an interest
stated price. Options rate swap would
are of two types - Calls involve one party
and Puts options 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 Securities and Exchange Board of
The absence of conditions of perfect India (SEBI) is the regulatory authority
competition in the securities market in India established under Section 3 of
makes the role of the Regulator SEBI Act, 1992.
extremely important. The regulator In particular, it has powers for:
ensures that the market participants •Regulating the business in stock
behave in a desired manner so that exchanges and any other securities
securities markets
market continues to be a major source •Registering and regulating the working
of finance for corporate and of stock brokers, sub–brokers etc.
government and the interest of •Promoting and regulating self-
investors are protected. regulatory organizations
•Prohibiting fraudulent and unfair trade
Who regulates the Securities practices
Market? •Calling for information from,
The responsibility for regulating the undertaking inspection, conducting
securities market is shared by inquiries and audits of the stock
exchanges, intermediaries, self –
regulatory organizations, mutual funds
and other persons associated with the