Financial Products in Secondary Market
The following are the main financial products/instruments dealt in the secondary market.
Equity, one of the important financial products is the ownership interest in a company of holders of its common and preferred stocks. The various kinds of equity shares are as follows:
Equity Shares :
An equity share is commonly referred to as an ordinary share. It represents the form of fractional ownership in which a shareholder, as a fractional owner, undertakes the entrepreneurial risk associated with a business venture. The holders of equity shares are members of the company and have voting rights. A company may issue such shares with differential rights for voting, payment of dividend, etc.
Rights Issue/Rights Shares :
This refers to the issue of new securities to the existing shareholders, at a ratio to those shares already held.
Bonus Shares :
These shares are issued by the companies to their shareholders free of cost by capitalisation of accumulated reserves from the profits earned in the earlier years or out of the share premium account.
Preferred Stock/Preference Shares :
These Shares do not offer voting rights. Owners of these shares are entitled to a fixed dividend calculated at a fixed rate to be paid regularly before any dividend can be paid in respect of equity share. These shareholders also enjoy priority over the equity shareholders in the payment of surplus. In the event of liquidation, their claims rank below the claims of the company’s creditors, bondholders/debenture holders, etc., but above the claims of the equity shareholders.
Cumulative Preference Shares :
This is a type of preference share on which dividend accumulates if it remains unpaid. All arrears of preference dividend have to be paid out before paying dividend on equity capital of the company.
Cumulative Convertible Preference Shares :
This is a type of preference share where the dividend payable on the same accumulates, if not paid. After a specified date, these shares will be converted into equity capital of the company.
Participating Preference Share :
This refers to the right of certain preference shareholders to participate in profits, after a specified fixed dividend contracted for is paid. Participation right is linked with the quantum of dividend paid on the equity shares over and above a particular specified level.
Security Receipts :
Security receipts mean receipts or other securities, issued by a securitisation company or a reconstruction company to any qualified institutional buyer pursuant to a scheme, evidencing the purchase or acquisition by the holder thereof, of an undivided right, title or interest in the financial assets involved in the securitisation.
Government Securities (G-Secs) :
These are sovereign (credit risk free) coupon-bearing instruments which are issued by the Reserve Bank of India on behalf of the Government of India, in lieu of the Central Government’s market borrowing programme. These securities have a fixed coupon that is paid on specific dates on a half-yearly basis. These securities are available in a wide range of maturity dates, from short-dates (less than one year) to long-dated (up to thirty years). The Government issues zero coupon bonds/securities too.
Debentures are bonds issued by a company bearing a a fixed rate of interest usually payable half-yearly on specific interest and the principal amount repayable on a particular date on redemption of the debentures. Debentures are normally secured/charged against the asset of the company in favour of the debenture holder.
A bond is a negotiable certificate evidencing indebtedness. It is normally unsecured.
A Bond (debt security) security is generally issued by a company, municipality or a government agency. A bond investor lends money to the issuer and in exchange, the issuer promised to repay the loan amount on a specified maturity date. The issuer usually pays the bond holder periodic interest payments over the life of the loan. The various types of bonds are as follows:
Coupon Bonds :
These are normal bonds on which the issuer pays the investor/holder interest at the predetermined rate (known as coupon) a agreed intervals, normally twice a year. The maturity of the bond is known by the period for which it is issued. In the secondary market, since the interest income is fixed to the face value, these bonds are traded at yield to maturity (YTM) based on market rate of interest.
Zero Coupon Bond :
A bond issued at a discount and repaid at a face value is called a Zero Coupon Bond. No periodic interest is paid in this case. The difference between the issue price and redemption price (face value) represents the return to the holder. The buyer of these bonds receives only one payment, at the maturity of the bond.
Convertible Bond :
A bond giving the investor the option to convert the bond into equity at a fixed conversion price is referred to as a Convertible Bond.
Commercial Paper :
Commercial Papers are borrowings of a company from the market. They take the shape of short-term promises to repay fixed amounts. They are placed on the market either directly or through specialized intermediaries.
Commercial papers are usually issued by companies with a high credit standing in the form of promissory notes, redeemable at par, to the holder on maturity and, therefore, does not require any guarantee. Commercial papers are money market instruments issued normally for a tenure of ninety days.
Treasury Bills :
These are short-term bearer discount security, issued by the Government (through the Reserve Bank of India) as a means of meeting its cash requirements.