What is the meaning 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. The company or entity that issues the
security is known as the issuer.

Securities are typically divided into 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. Debt securities include government and corporate bonds, certificates of
deposit (CDs), preferred stock and collateralized securities.

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 Commission.

There Are Three Types of Securities

1. Equity securities are shares of a corporation. You can buy stocks of a company through a
broker. You can also purchase shares of a mutual fund that selects the stocks for you. The
secondary market for equity derivatives is the stock market. It includes the New York Stock
Exchange, the NASDAQ, and BATS.

An initial public offering is when companies sell stock for the first time. Investment banks, like
Goldman Sachs or Morgan Stanley, sell these directly to qualified buyers. IPOs are an expensive
investment option. Thes companies sell them in bulk quantities. Once they hit the stock market,
their price typically goes up. But you can't cash in until a certain amount of time has passed. By
then, the stock price might have fallen below the initial offering.

2. Debt securities are loans, called bonds, made to a company or a country. You can buy bonds
from a broker. You can also purchase mutual funds of selected bonds.Rating companies evaluate
how likely it is the bond will be repaid. These firms include Standard & Poor's, Moody's, and
Fitch's. To ensure a successful bond sale, borrowers must pay higher interest rates if their rating
is below AAA. If the scores are very low, they are known as junk bonds. Despite their risk,
investors buy junk bonds because they offer the highest interest rates.
Corporate bonds are loans to a company. If the bonds are to a country, they are known as
sovereign debt. The U.S. government issues Treasury bonds. Because these are the safest bonds

3. Derivative securities are based upon the value of underlying stocks, bonds or other assets.
They allow traders to get a higher return than buying the asset itself. Stock options allow you to
trade in stocks without buying them upfront. For a small fee, you can purchase a call option to
buy the stock at a specific date at a certain price. If the stock price goes up, you exercise your
option and buy the stock at your lower negotiated price. You can either hold onto it or
immediately resell it for the higher actual price.

A put option gives you the right to sell the stock at on a certain date at an agreed-upon price. If
the stock price is lower that day, you buy it and make a profit by selling it at the agreed-upon,
higher price. If the stock price is higher, you don't exercise the option. It only cost you the fee
for the option.Futures contracts are derivatives based on commodities. The most common are
oil, currencies, and agricultural products. Like options, you pay a small fee, called a margin. It
gives you the right to buy or sell the commodities for an agreed-upon price in the future.
Futures are more dangerous than options because you must exercise them. You are entering
into an actual contract that you have to fulfill.

Asset-backed securities are derivatives whose values are based on the returns from bundles of
underlying assets, usually bonds. The most well-known are mortgage-backed securities, which
helped create the subprime mortgage crisis. Less familiar is asset-backed commercial paper. It is
a bundle of corporate loans backed by assets such as commercial real estate or autos.
Collateralized debt obligations take these securities and divide them into tranches, or slices,
with similar risk.

Auction-rate securities were derivatives whose values were determined by weekly auctions of
corporate bonds. They no longer exist. Investors thought the returns were as safe as the
underlying bonds. The securities' returns were set according to weekly or monthly auctions run
by broker-dealers. It was a shallow market, meaning not many investors participated. That made
the securities riskier than the bonds themselves. The auction-rate securities market froze in
2008.
Some of the major methods of issuing corporate securities are as follows: 1. Public Issue or
Initial Public Offer (IPO) 2. Private Placement 3. Offer for Sale 4. Sale through Intermediaries 5.
Sale to Inside Coterie 6. Sale through Managing Brokers 7. Privileged Subscriptions.

1. Public Issue or Initial Public Offer (IPO):

Under this method, the company issues a prospectus to the public inviting offers for
subscription. The investors who are interested in the securities apply for the securities they are
willing to buy. Advertisements are also issued in the leading newspapers. Under the Company
Act it is obligatory for a public limited company to issue a prospectus or file a statement in lieu
of prospectus with the Registrar of Companies.

Once subscriptions are received, the company makes allotment of securities keeping in view the
prescribed requirements. The prospectus must be drafted and issued in accordance with the
provisions of the Companies Act and the guidelines of SEBI. Otherwise it may lead to civil and
criminal liabilities.

Public issue or IPO method is quite cumbersome involving a large number of administrative
problems. Moreover, this method does not guarantee the raising of adequate funds unless the
issue is underwritten. In short, this method is suitable for reputed companies which want to
raise large capital and can bear the large costs of a public issue.

2. Private Placement:

In this method, the issuing company sells its securities privately to one or more institutional
brokers who in turn sell them to their clients and associates. This method is quite convenient
and economical. Moreover, the company gets the money quickly and there is no risk of non-
receipt of minimum subscription.

Private placement, however suffers from certain drawbacks. The financial institution may insist
on a huge discount or other conditions for private purchase of securities. Secondly, it may not
sell the securities in the market but keep them with it.

This deprives the public a chance to purchase securities of a flourishing company and there may
be concentration of the company’s ownership in a few hands. Private placement is very suitable
for small issues particularly during depression.
3. Offer for Sale:

Under this method, the issuing company allots or agrees to allot the security to an issue house
at an agreed price. The issue house or financial institution publishes a document called an ‘offer
for sale’. It offers to the public shares or debentures for sale at higher price. Application form is
attached to the offer document. After receiving applications, the issue house renounces the
allotment in favour of the applicants who become direct allottees of the shares or debentures.

This method saves the company from the cost and trouble of selling securities directly to the
investing public. It ensures that the whole issue is sold and stamp duty payable on transfer of
shares is saved. But the entire premium received is retained by the offerer and not the issuing
company.

4. Sale through Intermediaries:

In this method, a company appoints intermediaries like stock brokers, commercial banks and
financial institutions to assist in finding market for the new securities on a commission basis.
The company supplies blank application forms to each intermediary who affixes his seal on
them and distributes the among prospective investors. Each intermediary gets commission on
the amount of security applications bearing his seal. However, intermediaries do not guarantee
the sale of securities.

This method is useful when a company has already offered 49 per cent of issue to the general
public which is essential for listing of securities. The pace of sale of securities may be very slow
and there is uncertainty about the sale of whole lot of securities offered through intermediaries.
But this method saves the administrative problems and expenses involved in direct selling of
securities to the public.

5. Sale to Inside Coterie:

A company may resort to subscription by promoters and directors. This method helps to save
the expenses of public issue. Generally, a percentage of new issue of securities is reserved for
subscription by the inside coterie who can in this way share the future prosperity of the
company.
6. Sale through Managing Brokers:

Sale of securities through managing brokers is becoming popular particularly among new
companies. Managing brokers advise companies about the proper timing and terms of the issue
of securities. They assist companies in pre-issue publicity, drafting and issue of prospectus and
getting stock exchange listing. They also enlist the support and cooperation of share brokers.

7. Privileged Subscriptions:

When an existing company wants to issue further securities, it is required to offer them to
existing shareholders on prorate basis. This is known as ‘Rights Issue’. Sale of shares by rights
issues is simpler and cheaper as compared to sale through prospectus.

But the existing shareholders will subscribe to the new issues only when the past performance
and future prospects of the company are good. An existing company may also issue Bonus
Shares free of charge to the existing shareholders by capitalising its reserves and surplus

Secondary Market
For buying equities, the secondary market is commonly referred to as the "stock market." This
includes the New York Stock Exchange (NYSE), Nasdaq and all major exchanges around the
world. The defining characteristic of the secondary market is that investors trade among
themselves.

That is, in the secondary market, investors trade previously issued securities without the issuing
companies' involvement. For example, if you go to buy Amazon (AMZN) stock, you are dealing
only with another investor who owns shares in Amazon. Amazon is not directly involved with
the transaction.

In the debt markets, while a bond is guaranteed to pay its owner the full par value at maturity,
this date is often many years down the road. Instead, bondholders can sell bonds on the
secondary market for a tidy profit if interest rates have decreased since the issuance of their
bond, making it more valuable to other investors due to its relatively higher coupon rate.
The secondary market can be further broken down into two specialized categories: auction
market and dealer market.

1. Auction market: In the auction market, all individuals and institutions that want to trade
securities congregate in one area and announce the prices at which they are willing to buy and
sell. These are referred to as bid and ask prices. The idea is that an efficient market should
prevail by bringing together all parties and having them publicly declare their prices. Thus,
theoretically, the best price of a good need not be sought out because the convergence of
buyers and sellers will cause mutually-agreeable prices to emerge. The best example of an
auction market is the New York Stock Exchange (NYSE).

2. Dealer market: In contrast, a dealer market does not require parties to converge in a central
location. Rather, participants in the market are joined through electronic networks. The dealers
hold an inventory of a security, then stand ready to buy or sell with market participants. These
dealers earn profits through the spread between the prices at which they buy and sell
securities. An example of a dealer market is the Nasdaq, in which the dealers, who are known as
market makers, provide firm bid and ask prices at which they are willing to buy and sell a
security. The theory is that competition between dealers will provide the best possible price for
investors.

The OTC Market

Sometimes you'll hear a dealer market referred to as an over-the-counter (OTC) market. The
term originally meant a relatively unorganized system where trading did not occur at a physical
place, as we described above, but rather through dealer networks. The term was most likely
derived from the off-Wall Street trading that boomed during the great bull market of the 1920's,
in which shares were sold "over-the-counter" in stock shops. In other words, the stocks were
not listed on a stock exchange - they were "unlisted".

Over time, however, the meaning of OTC began to change. The Nasdaq was created in 1971 by
the National Association of Securities Dealers (NASD) to bring liquidity to the companies that
were trading through dealer networks. At the time, few regulations were placed on shares
trading over-the-counter - something the NASD sought to improve. As the Nasdaq has evolved
over time to become a major exchange, the meaning of over-the-counter has become fuzzier.
Today, the Nasdaq is still considered a dealer market and, technically, an OTC. However, today's
Nasdaq is a stock exchange and, therefore, it is inaccurate to say that it trades in unlisted
securities.

Nowadays, the term "over-the-counter" refers to stocks that are not trading on a stock exchange
such as the Nasdaq, NYSE or American Stock Exchange (AMEX). This generally means that the
stock trades either on the over-the-counter bulletin board (OTCBB) or the pink sheets. Neither
of these networks is an exchange; in fact, they describe themselves as providers of pricing
information for securities. OTCBB and pink sheet companies have far fewer regulations to
comply with than those that trade shares on a stock exchange. Most securities that trade this
way are penny stocks or are from very small companies.

How to Issue a Corporate Bond ???

Corporate bonds allow companies to raise money by issuing corporate debt in the form of
investment securities.

The issuance of a corporate bond is a common way for corporations to raise money for its
business operations. The idea behind corporate bond issuance is to secure a business loan that
is favorable for both the issuer (borrower) and the bondholder (investor). The issuance process
involves multiple parties and must comply with government regulations throughout the entire
process.

Underwriting

The issuing corporation must first acquire the services of an underwriter, which will usually be
an investment bank. The underwriter seeks to buy the bonds from the issuer and sell the bonds
to investors. Because of the risk involved in buying these bonds, underwriters will seek out
partnerships with other investment banks to share the underwriting responsibilities and risk.
This partnership is referred to as a syndicate. The underwriter and issuer will have the aid of
legal counsel throughout the process.

Regulatory Compliance

An issuer must file a registration statement and preliminary prospectus with the Securities and
Exchange Commission 20 days prior to a corporate bond’s public offering. The issuer may have
the option of “on the shelf” registration, meaning the issuer can register the bond without
having to sell the entire issue all at once -- this allows the issuer to time the issue’s entry into
the bond market according to market conditions.

Bond Structuring

The largest purchasers of corporate bonds are institutional investors, and underwriters often
will poll these investors to help determine appropriate coupon rates and maturities. It is
important for the underwriter to structure these corporate bonds according to the investment
objectives of both the issuer and investor. Once the initial pricing of a bond issue is established,
the underwriter will submit the pricing to the Trade Report and Compliance Engine.

Bringing Bond to Market

The underwriter is responsible for filing certain paperwork with the Depository Trust and
Clearing Corporation. Once this paperwork has been filed, the underwriter will commence with
the public sale of the corporate bond issue. The fee that the underwriter earns will be the initial
price paid to the issuer for taking on the corporate bond, minus the price at which the corporate
bond is offered to the public.