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What are Securities? Types, Roles and levels of Securities

IndianMoney.com Research Team | Posted On Monday, January 28,2019, 04:01 PM

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What are Securities? Types, Roles and levels of Securities

 

 

What are securities?

A security is a certificate or other financial instrument that has monetary value and can be traded. Securities are generally classified into two categories. They are debt security and equity securities. For a holder, a security represents an investment as an owner, creditor or rights to ownership on which the person hopes to gain profits. When businesses issues securities in the form of stocks and bonds, investors buy them, thereby providing necessary funds that the company needs.

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What are securities? Types, Roles and levels of Securities

Types of securities:

Securities can be classified into three categories. They are as follows:

  • Debt security: Debt security refers to a fixed income instrument, like a government bond, corporate bond, certificate of deposit (CD), municipal bond or preferred stock, that can be bought or sold between two parties and has basic terms defined, like notional amount (amount borrowed), interest rate, maturity and renewal date.
  • Equity security: An equity security is an investment in stock issued by another company. The accounting for an investment in an equity security is determined by the amount of control and influence over operating decisions, the company purchasing the stock has over the company issuing the stock.
  • Derivatives: A derivative is a contract between two or more parties whose value depends on an agreed-upon underlying financial asset (like a security) or set of assets (like an index). Common derivatives instruments include bonds, commodities, currencies, interest rates, market indexes and stocks.

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Role of Securities market:

The securities market has three main functions. They are as follows:

  • A security market is created to help growing companies and corporations. A securities market helps companies or corporates raise funds for growth and other purposes by enabling members invest or lend their own funds. As the source of funds are limited, customers must participate in financing operations.
  • The second important function of a security market is that it enables investors and lenders locate securities that meet objectives and financial goals. The securities market also provides a platform where the buyers and the sellers can meet and participate in trading. 
  • The third function of securities market is that it provides liquidity to the securities that are traded within the requisite domain. The instruments sold in the market have high liquidity. These financial products can be sold at any point in time and easily converted back into cash.

Levels of securities market:

The securities market can be classified into primary and secondary market:

  • Primary market: a primary market is a part of the financial market where the new securities, shares and bonds are issued to the general public for the first time. The companies issue their shares in the primary market through the process of initial public offering (IPO) and follow-on public offerings (FPO). In the primary market, trading takes place directly between the investors and the company. IPO is the process of launching shares for the very first time in the primary market to raise money from investors. FPO is the process in which the already listed companies offer fresh equity in the market, to raise additional funds from investors.
  • Secondary market: the secondary market is a place where securities purchased in the primary market are traded over stock exchanges like NSE and BSE. In the secondary market, trading takes place between investors through an intermediary. These intermediaries are known as brokers who facilitate the trade. The securities in the secondary market can be sold innumerable times.

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National Security Act:

The National Security Act of 1980 is an act of the Indian Parliament promulgated on 23rd September, 1980, whose purpose is "to provide for preventive detention in certain cases and for matters connected therewith". The act extends to the whole of India except the State of Jammu and Kashmir. The act contains 18 sections.

Securities and exchange board India:

SEBI is responsible for maintaining a stable investment and financial market in India. The board was established in 1988, but not given any regulating abilities until 1992 when the Securities and Exchange Board of India Act was passed. The main purpose of SEBI is to safeguard the rights and interests of the investor, reduce malpractices related to stock exchange, establishing a code of conduct and promoting healthy functioning of the stock exchange. 

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