To understand security instruments, let’s first understand the Security Market. A security market is a place where all the dealing of securities takes place. It is classified into primary and secondary markets. The primary market is where securities are created. In this market, companies sell new stocks and bonds to the public for the first time. The secondary market deals in securities in the stock exchange where traders trade among themselves and companies are not involved, such as in NIFTY, SENSEX etc.
Investments done in the Securities Market are of two forms: Equities and Debts. These products are bought and sold in the security market. Let us understand one by one.
Equity is a part of a company, also known as stock or share. When you buy shares of a company, you are one of the company’s owners called shareholders. If the company does well, it distributes part of its profits among its shareholders, called dividends. Another way to make income through stocks is to trade them in the equity market or stock exchanges. You would buy shares at a low price and sell them at a higher price. Various economic factors drive the market prices, and standard indices like the Sensex and the Nifty indicate market trends. Investing in equities is riskier and demands more time than other investments.
Debt Securities such as a bond, debenture, promissory note etc., have a fixed amount, a maturity date, and usually a specific interest rate. These are often less risky than equities. They are issued by companies or government institutions seeking money from investors as loans in the capital market. It is referred to as a debt issue. Unlike equity shares, and debt securities holders are not the company’s owners. One can get returns on bonds by receiving interest or by selling them.
showing the difference between Debt and Equity securities
What are Mutual Funds-
You must have seen advertisements on television related to “mutual funds Sahi hai.”
showing How Mutual Fund works
A mutual fund is a big pool of money created by the contributions of small investors. Professional fund managers manage the money and invest it in different sectors to provide returns. The returns for the individual investors are calculated by arriving at the Net Asset Value (NAV). When you invest in a mutual fund, you invest in a portfolio and not in separate shares. The mutual fund portfolio can be equity, debt or a combination of both. Mutual funds are also subject to market fluctuations and can be risky. There are funds specifically investing in low-risk sectors. However, then the returns may be lower.
SECURITY AND EXCHANGE BOARD OF INDIA
Like RBI regulates banking operations, the Securities Exchange Board of India (SEBI) is the statutory body that monitors and controls the securities market and protects the interests of the investors by enforcing specific rules and regulations. The primary reason for building SEBI was to prevent malpractices in the market and to promote development.
As per SEBI guidelines, customers dealing in securities must have a Demat account that holds the asset and trading account units that hold money to undertake transactions in the markets. There are guidelines concerning securities and their exchange which can be further read on their website.