A part of the financial market is the capital market and part of this capital market is the securities market, where securities are bought and sold.
In this article, we will discuss securities and its various important aspects in a simple and easy way, so read this article till the end.
What is a Security?
- A security is a type of financial instrument that has some monetary value. For example, suppose you buy shares of a company, what do you get in return, just a certificate, which can be in the form of a paper or in electronic form.
- So have we spent that much money for a certificate? Not at all, that certificate simply ensures that you hold shares in a company that has a monetary value of its own.
- Monetary value means that if you sell it, you will get the same amount of money as its price in the market at that time. Let us understand this by example.
- Like you and your friend started a shop together. Your friend gave 900 rupees while you gave 100 rupees. That is, you have 10 percent share of that shop. After one year the price of that shop becomes Rs.2000. According to 10 percent, your share also goes from Rs 100 to Rs 200. Now if you do not want to continue as a partner in this shop for some reason, what will you do? Obviously you will sell your 10% share and in return you will get Rs 200.
That is, you are safe about the fact that if you ever sell that share, then you will get that much money according to the market value of that time. That is why it is called security.
What is securities market?
- Shares, bonds, debentures, mutual funds, etc. are all securities. The capital market in which its buying and selling takes place is called securities market. That is, the securities market is a part of the capital market itself, where capital is raised for a long term by buying and selling securities.
Types of security market
There are two types of capital raising in the security market
- Primary market
- Secondary market
1. Primary market
If the sale of shares, bonds, debentures etc. is done directly to the investors by the raiser of capital, then it is called primary market business. In other words, if a person or investor buys the shares of a company directly from the company, then it is called primary market and the share buyer is called ‘primary shareholder’.
Methods of raising capital from the primary market
- Proposal through Prospectus – Through this a company seeking capital prepares a prospectus which contains all the necessary information that an investor needs to know before buying shares of that company. This brochure is distributed to the potential investors through various types of advertisements and through this the company appeals to the people to buy its shares.
- Offer for Sale – Under this method, the company does not issue its securities directly to the public but they are offered for sale through intermediaries such as stock brokers. And this broker sells these securities to the public.
- Private Investment – Under this method, the company sells its securities to selected individuals or to institutional investors. This helps in quick capital raising and avoids expenses that could have been incurred during issuance to the public.
- Rights issue – It is a prerogative of the companies to give the opportunity to buy their new shares only to their old shareholders if they want.
- E-IPO – IPO i.e. Initial Public Offering (Initial Public Offering). Whenever a company brings its securities to the stock market for the first time, it is called IPO. Since everything is online now that’s why when a company uses the online system of stock exchange to issue an IPO then it is called E-IPO.
2. Secondary Market
If a person or investor does not buy the shares of a company directly from the company but buys it from another person or investor in the market, then it is called secondary market.
What we call the so-called stock market is actually the secondary market. Because the company does not issue its shares again and again, but once the shares are issued, people keep buying and selling the same shares among themselves. And its price keeps getting fixed based on the performance of the company and demand and supply etc.
Talking about the Indian securities market, it has many components; Such as SEBI which is its regulatory agency. All the work like buying and selling etc. is governed under the rules made by it. Apart from this, stock exchange, stock index, broker, FII (Foreign institutional investors), jobbers, etc. are all part of the securities market.
Basic difference between primary market and secondary market
|Primary Market (New Issuance Market)||Secondary Market (Stock Exchange)|
|It usually involves the sale of securities by new companies. Simultaneously, new securities are issued by already established companies to investors.||Shares that have been issued once in the primary market. He is doing business here. That is, new shares are not issued here.|
|In this, the company sells the securities, either directly or through an intermediary.||There is buying and selling of already issued securities among investors. This means that the company has no role to play.|
|In this, the fund goes from the savers to the investors. That is, the primary market directly promotes capital formation.||The second market indirectly encourages capital formation.|
|In the primary market, there is only purchase of securities, they cannot be sold.||Both buying and selling of securities take place in the stock exchange.|
|In this market, the management of the company takes the determination of price and the decision regarding it.||In this, the prices are determined by the demand and supply of the security.|
Types of securities
Securities are generally divided into three parts. 1. Equity Securities 2. Debt Securities 3. Derivatives
1. Equity Securities
Securities that represent partial ownership of a company. In other words, a financial instrument that ensures a partial stake in a company. such as shares.
If you buy a share of a company, it means that you are buying a stake in that company. By doing this you also become a member of that company. This is a big deal because only this small share in the stock market is bought and sold.
That is why to understand the share market, at least you must remember it because it is directly related to the stock market. Similarly, what you will read below is linked to the bond market.
2. Debt securities
Debt securities mean debt or debt related securities such as bonds, debentures, bank notes, etc. That is, in other words, if you buy a bond of a company, then you are not going to get the share of that company, just you get interest at a fixed rate.
The buying and selling of debt securities takes place under the bond market and it also works like the stock market. That is why before understanding the bond market, it is important that you first understand the stock market.
Derivatives are also a type of security. There are four types of this forward, futures, options and swaps. Where derivatives are bought and sold, we call it derivatives market. Derivatives is a different system of the stock market, so when you understand the stock market well, then definitely read it.
Here we have understood about three types of securities. All three of these are bought and sold through stock exchanges.