Securities and Markets Overview
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Questions and Answers

What are securities?

Securities are transferrable financial instruments or contracts that show evidence of indebtedness or ownership interest in assets of an incorporated entity.

What is the core function of the securities market?

The securities market brings together buyers and sellers of securities, creating liquidity and facilitating the transfer of resources from savers to borrowers.

Which of these is NOT considered a security under the Securities Contracts (Regulation) Act, 1956 (SCRA)?

  • Shares of an incorporated company
  • Derivative contracts
  • Units of a mutual fund scheme
  • Unit linked insurance policy (correct)

Which type of security represents fractional ownership in a business venture?

<p>Equity shares (D)</p> Signup and view all the answers

Which term is used to describe instruments for raising long-term debt, typically secured or unsecured?

<p>Debuntures (D)</p> Signup and view all the answers

Fully Convertible Debentures (FCDs) are debt instruments that can never be transformed into equity shares.

<p>False (B)</p> Signup and view all the answers

What type of bond is issued by a company in a currency different from its home currency?

<p>Foreign Currency Bonds (C)</p> Signup and view all the answers

What is the difference between a Masala Bond and a Foreign Currency Bond?

<p>A Masala Bond is an external bond denominated in Indian Rupees, while a Foreign Currency Bond is issued in a currency other than the issuer's home currency. The currency risk is borne by the investor in a Masala bond, whereas the issuer bears the currency risk in a Foreign Currency Bond.</p> Signup and view all the answers

What are warrants?

<p>Warrants are options that entitle an investor to buy equity shares of the issuer company at a pre-determined price after a specified time period.</p> Signup and view all the answers

Which type of security tracks the market movement by using the prices of a specific set of shares?

<p>Indices (B)</p> Signup and view all the answers

Which of the following is NOT a commonly tracked index in India?

<p>S&amp;P BSE 200 (B)</p> Signup and view all the answers

Which of these are the primary advantages of indices?

<p>All of the above (D)</p> Signup and view all the answers

What is a mutual fund?

<p>A mutual fund is an investment vehicle that pools together money from investors and invests it in a portfolio of securities, aiming to achieve common investment objectives.</p> Signup and view all the answers

How do open-ended mutual funds differ from closed-ended mutual funds?

<p>Open-ended funds allow investors to buy and sell units anytime at the NAV linked prices. (A)</p> Signup and view all the answers

Exchange Traded Funds (ETFs) are passively managed portfolios that are not listed on stock exchanges.

<p>False (B)</p> Signup and view all the answers

Which of these is a key feature of ETFs?

<p>Tracking a specific index, commodity, or basket of assets (B)</p> Signup and view all the answers

What is a preference share?

<p>A preference share is a special kind of equity share with preference over common equity shares in the distribution of dividends and assets during liquidation.</p> Signup and view all the answers

Which type of debenture can be fully converted into equity shares at a future date?

<p>Convertible Debenture (B)</p> Signup and view all the answers

What are the benefits of issuing Convertible Debentures for a company?

<p>Convertible Debentures typically have a lower coupon rate than pure debt instruments, and they offer a way for companies to avoid repaying the debt on maturity by issuing shares instead.</p> Signup and view all the answers

Which type of depository receipt is issued and traded in the US market by a non-US company?

<p>ADRs (B)</p> Signup and view all the answers

What is the key difference between a sponsored and an unsponsored Depositary Receipt?

<p>Sponsored Depositary Receipts are initiated and issued by the company itself, and they can be listed on exchanges, while Unsponsored Depositary Receipts are initiated by investors and are typically not listed on exchanges.</p> Signup and view all the answers

What is a Global Depositary Receipt (GDR)?

<p>A GDR is a depository receipt that can be traded in multiple countries, often in the European Union member states, allowing companies access to wider investor bases.</p> Signup and view all the answers

Which of these is a benefit of investing in Depository Receipts for investors?

<p>Exposure to international stocks through domestic markets (B)</p> Signup and view all the answers

What are FCCBs?

<p>Foreign Currency Convertible Bonds (FCCBs) are dollar-denominated convertible debt papers issued by companies in international markets, typically with an optional conversion feature.</p> Signup and view all the answers

Explain the concept of Equity Linked Debentures (ELDs).

<p>ELDs are floating rate debt instruments whose interest payments are linked to the performance of an underlying equity asset, like an index, individual stocks, or a basket of stocks.</p> Signup and view all the answers

Which statement BEST describes Commodity Linked Debentures (CLDs)?

<p>Debt instruments whose interest rate is linked to the performance of a specific commodity. (D)</p> Signup and view all the answers

What are Mortgage Backed Securities (MBS) and Asset Backed Securities (ABS)?

<p>MBS and ABS are debt instruments issued by institutions backed by receivables and cash flows from financial assets, such as home loans (MBS), auto loans, and credit card receivables.</p> Signup and view all the answers

What are REITs and InvITs?

<p>REITs (Real Estate Investment Trusts) and InvITs (Infrastructure Investment Trusts) are investment vehicles that pool money from investors and invest in revenue-generating real estate and infrastructure projects, respectively.</p> Signup and view all the answers

REITs and InvITs are required to distribute at least 90% of their distributable surplus cash flow to the unit holders.

<p>True (A)</p> Signup and view all the answers

What are commodities?

<p>Commodities are basic materials or goods that are largely homogenous in nature and interchangeable with other goods of the same type.</p> Signup and view all the answers

What are the key characteristics of precious metals as an investment?

<p>Precious metals like gold and silver offer long life, low storage costs, and can help preserve the real value of investments.</p> Signup and view all the answers

Explain the concept of Commodity ETFs.

<p>Commodity ETFs are exchange-traded funds (ETFs) that invest in a range of physical commodities, allowing investors to diversify their portfolios and gain exposure to commodity prices without directly owning or storing the physical commodities.</p> Signup and view all the answers

What is a Warehouse Receipt?

<p>A Warehouse Receipt is a document representing proof of ownership for a specific commodity stored in a warehouse.</p> Signup and view all the answers

What is a Managed Futures Contract?

<p>A Managed Futures Contract is a portfolio of futures contracts that are actively managed by professional investment managers, offering investors exposure to commodity price movements without directly owning the underlying commodities.</p> Signup and view all the answers

Flashcards

Securities

Transferrable financial instruments or contracts that show evidence of indebtedness or ownership interest in assets of an incorporated entity.

Securities Market

A market where investors and sellers buy and sell securities. It brings together a large number of buyers and sellers and creates liquidity.

Equity Shares

Shares that represent fractional ownership in a business venture. Equity shareholders own the company, bear the risk, and enjoy the rewards.

Debentures/Bonds/Notes

Instruments for raising long-term debt that can be either unsecured or secured (with collateral). They can be fully, partly, or non-convertible into equity shares.

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Foreign Currency Bonds

Bonds issued by a company in a currency different from its home country. It creates foreign currency risk for the issuer.

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External Bonds / Euro Bonds

Bonds issued in a currency different from the country where it's issued. Example: USD bonds issued in Kuwait. External bonds in INR are known as Masala bonds.

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Warrants and Convertible Warrants

Options that entitle an investor to buy equity shares of the issuer company after a specified period at a pre-determined price.

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Market Indices

A tool that tracks market movements by using the prices of specific shares as a representative sample. Most leading indices are weighted by market capitalisation.

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Mutual Funds

Investment vehicles that pool money from investors and invest in a portfolio of securities, reflecting common investment objectives. Investors share is represented by units.

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Exchange Traded Funds (ETFs)

An investment vehicle that invests pooled money to track an index, commodity, or basket of assets. Units are traded on a stock exchange, like stocks.

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Preference Shares

A special type of equity shares that have preference over common shares in receiving dividends and repayment of capital. Combines features of equity and debt.

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Convertible Debentures & Bonds

Debt instruments that can be converted into equity shares of the company at a future date. They combine debt and equity features.

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Depository Receipts (DRs)

Financial instruments representing shares of a foreign company traded in the local market. These can be sponsored (listed) or unsponsored (OTC).

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Country-Specific Depositary Receipts

ADRs, IDRs, HKDRs

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American Depositary Receipts (ADRs)

ADRs are depositary receipts issued by non-US companies and traded in the USA.

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Indian Depositary Receipts (IDRs)

IDRs are depositary receipts issued by non-Indian Companies and traded in India.

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Hong Kong Depositary Receipts (HKDRs)

HKDRs are depositary receipts issued by non-Hong Kong companies and traded in Hong Kong.

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Global Depositary Receipts (GDRs)

DRs that are allowed to be traded in multiple countries. Typically, GDRs are issued in the European Union.

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Foreign Currency Convertible Bonds (FCCBs)

Foreign currency (usually dollar) denominated convertible debt papers issued by companies in international markets. They are usually optionally convertible.

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Equity Linked Debentures (ELDs)

Floating rate debt instruments whose interest is based on the returns of the underlying equity asset, like Nifty 50 or individual stocks. Usually structured to provide capital protection.

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Commodity Linked Debentures (CLDs)

Floating rate debt instruments whose interest is based on the returns of the underlying commodity asset, like gold and silver. Provide the investor the opportunity to earn returns from the commodity markets while protecting their initial capital.

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Mortgage Backed Securities (MBS) and Asset Backed Securities (ABS)

Debt instruments issued by institutions against receivables and cash flows from financial assets, such as home loans (MBS), auto loans, or credit card receivables. Create liquidity in illiquid assets.

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REITs/InvITs

Investment vehicles that pool money from investors and invest in revenue-generating real estate projects (REITs) or infrastructure projects (InvITs). They issue units to investors and distribute at least 90% of distributable surplus cash flow to the unit holders.

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Commodities

Basic materials or goods that are largely homogeneous in nature and interchangeable with other goods of the same type.

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Precious Metals

Precious metals such as gold and silver, viewed as an investment that can help preserve real value, have long life and low storage cost.

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Commodity ETFs

An ETF that invests in a range of physical commodities, allowing investors to gain exposure to commodity markets without the hassle of storage.

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Managed Futures Contract

A portfolio of futures contracts that are actively managed by professionals. Investors can gain exposure to commodities through these contracts.

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Warehouse Receipts

A document representing proof of ownership of a certain quantity of a specific commodity stored in a warehouse.

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Study Notes

Securities and Securities Markets

  • Securities are financial instruments representing ownership or debt, issued by companies, institutions, or governments.
  • Securities markets facilitate the exchange of securities, creating liquidity and enabling the transfer of capital from savers to borrowers.
  • Key participants include investors, borrowers, intermediaries, and regulatory bodies.

Equity Shares

  • Represent fractional ownership in a company, offering risk and reward.
  • Issued by companies.
  • Investors include institutions (FPIs, FII, DIIs) and individuals (retail and HNIs).
  • Traded through stock exchanges.
  • Regulated by SEBI and Companies Act.

Debentures/Bonds/Notes

  • Long-term debt instruments issued by various entities.
  • Can be secured or unsecured.
  • Types include fully convertible, partly convertible, and non-convertible debentures.
  • Can be issued in domestic or foreign currencies.
  • Short-term debt instruments (e.g., Treasury Bills, Commercial Papers, Certificates of Deposit) exist for periods up to one year.

Foreign Currency Bonds/External Bonds/Masala Bonds

  • Foreign currency bonds: Issued in a foreign currency (e.g., USD). Create currency risk for the issuer.
  • External bonds (Eurobonds): Issued in a foreign currency in a country other than the company's home country.
  • Masala bonds: External bonds denominated in Indian Rupees (INR). Currency risk rests with the investor.

Warrants and Convertible Warrants

  • Warrants: Grant the option to buy shares at a fixed price after a set period.

Market Indices

  • Track market movements using the prices of representative securities (weighted by market capitalization).
  • Examples in India include Nifty 50, S&P BSE Sensex, and MSEI SX40.

Mutual Funds

  • Pool investor money to invest in a diversified portfolio.
  • Each investor's share is a unit, with value represented by Net Asset Value (NAV).
  • Schemes can be open-ended (no fixed maturity) or close-ended (fixed maturity and listed on exchanges).

Exchange Traded Funds (ETFs)

  • Passively managed investment vehicles tracking an index, commodity, or asset basket.
  • Listed and traded on stock exchanges, with prices reflecting underlying assets.
  • Typically lower expense ratios than mutual funds.

Hybrids/Structured Products

  • Preference Shares: Hybrid instruments with equity and debt features; preferential dividend and repayment rights. Types include cumulative and non-cumulative.
  • Convertible Debentures & Bonds: Debt instruments convertible into equity at a future date, potentially providing lower coupon rates for the issuer.
  • IDRs, GDRs, ADRs: Represent shares of foreign companies, traded in local markets. IDRs are for domestic Indian investors and GDRs (Global) or ADRs (American Depository Receipets) can have trading across borders.
  • FCCBs: Foreign currency convertible bonds issued offshore, with currency risk for the investor.
  • ELDs (Equity Linked Debentures): Floating rate bonds whose interest is tied to equity returns, offering capital protection.
  • CLDs (Commodity Linked Debentures): Floating rate bonds whose interest is tied to commodity prices.
  • MBS (Mortgage-Backed Securities) & ABS (Asset-Backed Securities): Debt instruments backed by cash flows from financial assets.

Commodities

  • Basic materials or goods, often homogenous. Examples include precious metals, agricultural products and commodity ETFs which invest in baskets of physical commodities providing storage and management benefits to investors.
  • Managed futures contracts allow investors to bet on the price changes of commodities using futures contracts.
  • Warehouse receipts represent ownership of stored commodities.

REITs/InvITs

  • REITs (Real Estate Investment Trusts) and InvITs (Infrastructure Investment Trusts) pool investor money to invest in real estate and infrastructure projects, respectively. Distribution of minimum percentage of assets back to the investors is enforced.

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Description

This quiz covers the basics of securities and securities markets, including equity shares and debentures. Learn about the key participants, types of financial instruments, and how they are regulated. Test your knowledge of ownership, debt, and market dynamics.

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