Types of Securities

Risk & Return

Chitra Potdar
Types of Securities
 Debt
 Equities
 Derivatives
 Debt
Meaning
Instruments
 Debt instruments are contracts in which one party lends money
to another on
 pre-determined terms with regard to rate of interest to be paid
by the
 borrower to the lender Eg: Bonds, Debentures

Features of Debt Instrument

 Maturity
 Coupon
 Principal
 Yield to Maturity
Debt
Risk in Debt Market
Classification
 Bond
A debt investment in which an investor loans money to an entity
(corporate or governmental) that borrows the funds for a
defined period of time at a fixed interest of rate
Types of Bonds
Government Bond


Muncipal Bond


Corporate Bond


 Zero Coupon Bond



Callable Bonds


Puttable Bonds


Convertible Bonds

 Money Market Instrument
These are Debt Instrument which have a maturity of less than 1 year at the
time of issue are called money market instrument. They are highly liquid &
have negligible risk. The money market is dominated by Govt Financial
Institution Banks & Corporates.

Instrument Major Participants Risk Maturity Investors

         
T Bills Sold by Union Govt Default Risk 91 days to 1 yr Bank ,Primary dealers, P.F,
         

Commercial Papers Financial Secured Firms Low Default Risk up toDays 270 Corporates
         

Certificate Deposits Commercial Banks& F.I Risker than Govt Bills up to 1 yr Bank, F.I,Corporate, M.F
         
Call Market F.I, M.F, Corporate Risker than Govt Bills up to 14 days Bank & Primary Dealers
         
Repo F.I Corporate  Low Risk 14 days Bank & Primary Dealers
 Participants
Market Segment Issuer Instruments Investors

Government Central Government Zero Coupon Bonds, Coupon Bearing R.B.I, Banks, insuarnce, companies, PFs,
Securities Bonds, Treasury Bills, STRIPS MFs,

State Governments Coupon Bearing Bonds.

Public Sector Bonds Government Agencies / Govt. Guaranteed Bonds, Debentures Banks FIIS & Corporate, Insurance, PFs, Mfs,
Statutory Bodies Individuals

Public Sector Units PSU Bonds, Debentures, Commercial

Paper

Private Sector Corporates Debentures, Bonds, Commercial Paper, Individual, Provident funds, Insurance Co,
Bonds Floating Rate Bonds, Zero Coupon Trusts & Mutual
Bonds, Inter-Corporate Deposits Funds

  Banks Certificates of Deposits, Debentures,

Bonds

  Financial Institutions Certificates of Deposits, Bonds

Types of Coupon Rates
 Fixed
 Floating
 Zero Coupon
Sources of Return for Bonds
 Coupon Payment
 Capital Gain/Loss
 Reinvestment Income
Types of Equities/Shares
 Equity Shares
 Preference Shares
Sources of Return for Equity
 Dividend
 Capital Gain/Loss
 Reinvestment Income
 Grouping of Shares
Category Nature of Security Specific Nature
Ordinary shares of companies with large capital Margin trading and day
A base, good growth record with regular dividends trading is allowed
& high trading volume in secondary market
Ordinary shares of companies of having less Cash trading and day
B1 liquidity but with good management & trading is allowed but
satisfactory growth prospects not margin trading
Ordinary shares other than A & B1 Cash trading and day
B2 trading is allowed but
not the margin trading
Physical shares of companies in A, B1, B2 Trading has to be
C
categories delivery based
Ordinary shares of companies not conforming to Trading has to be
T
certain requirements of BSE delivery based
F Non convertible debentures
G Central & State government securities
Factors Affecting Stock Market
 Two primary factors are
a) Internal factors
b) External factors
Internal Factors
 Market Capitalization
• Price of a stock is not the true indicator.
• Market capitalization of the company is more important in
determining the worth of the company
• Market capitalisation=(stock price) X (total number of
outstanding stocks)

 Earning Per Share

• Profit made per share on the last quarter.
• Most important factor for deciding the health of any
company
 Internal Factors
 Price/Earning Ratio
• Gives a fair idea of how a company's share price compares to its
earnings.
• If price of the share << the earning of the company the stock is
undervalued and therefore has the potential to rise in the near
future.
• If price of the share >> the actual earning of the company the
stock  is said to overvalued and the price can fall at any point.

 Take-over or Merger
• A target company is expected to get a stock price boost
• The company taking over another company shall experience a drop
in its share price.
 Internal Factors

 Dividend
• Announcement of a dividend generally leads to
increase in the stock price by an amount close to
the dividend per share value.
. 
 Insider Trading
“Trading of a corporation’s stock or other securities (e.g. bonds
or stock options) by individuals with potential access to non-
public information about the company”
• The buying or selling of stocks by these insiders
may herald some good or bad news about the
company.
 External factors
 Demand and Supply
• When more people are buying a certain stock, the price of
that stock increases and when more people are selling the
stock, the price of that particular stock falls

 New Major Contracts / Major Government Orders

• A company that is able to obtain new major contracts or
major government order is expected to see a bull run in its
stock price.  Those companies that fail in the contract
bidding normally experience the fate of sell-off in its stocks.
 External factors
 News 
• Positive news about a company can increase buying interest
in the market while a negative press release can ruin the
prospect of a stock.eg: price movements of RNRL and RIL
shares after Supreme court judgement
• However it is the overall performance of the company that
matters more than news

 Market sentiment
• The price of the stock of a company is affected most of the
time by the general market direction.
• In a bull market, the stock price of most companies will rise
and in a bear market the stock price of most companies will
fall. 
 External factors

  Performance of the Industry

• Most of the times, the stock price of the companies in the
same industry will move in tandem with each other.  This is
because market conditions will generally affect the
companies in the same industry the same way.
Derivatives
 Forwards
 Futures
 Options
 SWAPS