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What is the flexible meaning of the term 'securities'?
It can refer to security interests or guarantees, or transferable financial investments.
Commercial papers are considered securities.
False
Which of the following is NOT a characteristic of commercial papers?
What are examples of securities under Omani Law?
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A security is a financial instrument that can be traded on the financial market, such as _____ and _____ .
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Which of the following options is considered a type of debt security?
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Securities can refer to transferable financial investments in capital markets.
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Commercial papers are defined under Omani Law as financial instruments that are negotiable in commercial ways.
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Bonds are considered a type of equity security.
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Commercial papers are generally considered short-term, unsecured instruments that can be used as a substitute for cash.
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The legal definition of securities under Omani law includes a non-exhaustive enumeration of securities.
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Futures and options are classified under the category of debt securities.
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According to Omani law, a security can include financial contracts and property rights that are not tradeable.
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The maturity period of commercial papers usually exceeds one year.
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Sukuk is classified as a type of security under Omani law.
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All commercial papers are backed by collateral.
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Study Notes
Securities Defined
- Securities are not commercial papers such as bills of exchange or cheques
- Commercial papers are short-term, unsecured and negotiable instruments used in commerce as a substitute for money
- Securities are financial instruments that can be traded on the financial market
Defining Securities in Omani Law
- Royal Decree 46/2022 defines securities as financial contracts, property rights, or debt instruments that are tradeable and fungible
- Examples of securities under Omani law include stocks, bonds, sukuk and depository receipts
- Omani law does not define commercial papers
- UAE Commercial Transaction Code Article 509 defines commercial papers as written instruments that represent a right to a specific amount of money due at sight or after a specific period, and are negotiable in commercial ways
Examples of Commercial Papers
- Bills of exchange
- Cheques
- Instruments drawn for the purpose of commercial activity and recognized in commercial practice as acceptable forms of payment
Securities Definition
- "Securities" can have multiple meanings, it can refer to security interests and guarantees or it can refer to "transferable financial investments"
- Financial instruments are not commercial papers like checks or bills of exchange
- Commercial papers are negotiable instruments between merchants
- Financial instruments, on the other hand, are traded on the capital markets
- Article 509 of the UAE Commercial Transaction Code defines commercial papers
- 'Commercial papers' refer to written instruments of a specific form, that represents a right to receive a specified sum of money at sight, after a specific time, or can be specified
Types of Commercial Papers
- Bills of exchange, cheques, and other instruments used for commercial activity
- Commercial papers are used as a substitute for money
- Commercial papers are usually short-term, unsecured, and negotiable
- Commercial papers can be sold at a discounted value and redeemed later at its 'par value'
Securities Definition under Omani Law
- Royal Decree 46/2022 defines securities
- Securities are defined as financial contracts, property rights, or debt instruments that are tradeable and fungible
- Examples of securities include stocks, bonds, sukuk, and any other instruments stipulated in the law or determined by the board
Types of Securities in Omani Law:
- Chapter 4 of Royal Decree 46/2022 specifically regulates securities.
- Securities can include stocks, bonds, promissory notes, debt instruments, sukuk, depository receipts, derivative contracts, securities issued by the government, convertible depository receipts, rights, products connected to a security, a collective investment fund, and any other securities determined by the board.
Debt and Equity Securities
- Debt securities can be issued by any type of issuer.
- The relationship between issuer and holder is contractual. The issuer owes a debt to the holder. The holder is a creditor and is entitled to payment of principal and interest on the due dates.
- Equity securities are ownership interest in an economic venture, and therefore may only be issued by a commercial company.
- Equity securities are usually referred to as “ordinary shares,” “common shares,” or “common stock”
Key Features of Debt vs. Equity Securities:
- Shareholder's ranking in a liquidation: Shareholders are ranked behind creditors in a liquidation
- Debt security: does not entitle the holder to be treated as a member of the issuer
- Shareholders have a property right in the issuer, whereas creditors have a contractual right through a debt contract.
Hybrid securities
- Hybrid securities have the same features as debt securities, but also the rights to convert the debt into equity of the issuer.
- Convertible debt securities offer flexibility to investors because they can convert into equity if the issuer performs well.
- Prior to conversion, the holder receives a fixed income, and can choose not to convert if the issuer does not perform well.
- until they convert, the holder is a creditor.
- Convertible debt will rank ahead of the equity.
- The attraction to the investor is the flexibility.
Preferred shares
- Preferred shares are issued in different classes, based on their preferences.
- A company's articles of association may establish certain privileges for some of the shares, with respect to voting, dividends or proceeds of liquidation, or other rights.
- the shares of the same class shall have equal rights, privileges and limitations.
### Derivatives
- Derivatives are financial instruments that derive their value from an underlying asset.
- Types of derivatives include futures, options, swaps, and forwards.
Futures
- A futures contract is an agreement to buy or sell a specific asset at a predetermined price at a specified time in the future.
- Futures contracts are traded on exchanges, meaning there is a marketplace where traders can buy and sell futures contracts.
- Traders include hedgers to offset risks and speculators who attempt to profit from price fluctuations
- Futures can be used for various underlying assets like wheat, Treasury bills, stock indices, shares of individual companies, and even other derivatives.
Options
- an option is a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a certain price within a specified time frame.
- The buyer of an option pays a premium to the seller.
- There are two types of options:
- Call options give the buyer the right to purchase the underlying asset at a predetermined price
- Put options offer the buyer the right to sell the underlying asset at a predetermined price
Example of Futures Contract
- Suppose a coffee shop owner purchases coffee beans at OR 4/Kg and is concerned about potential price increases due to a sandstorm season.
- The owner purchases 1000 coffee bean futures contracts at OR 40/contract (each contract equals 10 kg of coffee)
- If the price of coffee beans rises to OR 5/Kg due to the sandstorm, the coffee shop owner will have locked in a price of OR 4/Kg for the coffee beans.
Futures Risks
- If a price for coffee beans declines, the owner will be able to sell their coffee at a higher price than the market price.
- If the price of coffee beans declines, the owner will be able to sell their coffee at a higher price than the market price.
Options Risks
- If the stock price goes down, the option buyer loses the premium paid, but no more.
- If the stock price goes up, the option seller loses money because the stock is sold at a lower price than the market price.
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Description
This quiz explores the definition and distinctions between securities and commercial papers as outlined in Omani law. It covers key legal decrees, classifications, and examples relevant to financial instruments in Oman. Test your knowledge on these concepts and their applications in finance.
