What you need to know about the Stock Market. What are securities in Stock Market? Well, one of the most promising investment channels in India today is stock market investment. If you are looking to invest in stocks to get passive income, understanding the stock market and how to invest in stocks is essential. So what are securities? Right below is all the knowledge to learn about securities that you should not ignore.
What are securities in Stock Market?
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What are securities?
Securities can be understood briefly as valuable papers such as stocks, bonds, fund certificates, etc., which are issued by organizations in accordance with the law. Securities can be in the form of certificates, electronic data or journal entries.
Investors put money to buy securities showing the relationship between owners of a part of contributed capital (shares) or creditors (bonds) to the business. This is also considered a commodity of the stock market, which can be bought and sold on the market or held like money.
Securities Classification
Securities today are divided into 3 most popular types:
Equity Securities
Equity securities are commonly known as common stocks. This is a type of security issued by a joint-stock company and represents the ownership of a part of the company’s capital and assets to shareholders.
Owners of equity securities are paid dividends if the company does well and benefits from arbitrage (buy low sell high). In addition, investors who own equity securities, namely common stock, also have the right to vote on important corporate activities.
In the event of bankruptcy or dissolution, shareholders will receive the remaining funds when the company has paid off its debts. Equity securities are usually issued in the form of preferred shares, common shares, fund certificates, etc.
Debt Securities
Debt securities are securities used to confirm a lender-borrower relationship. When you own debt securities or corporate bonds, you are a creditor and the company is obligated to repay. Debt securities represent loan amount, interest rate, term, maturity, etc.
In case the company goes bankrupt and cannot pay its debts, the owners of these securities will have priority to be paid before the owners of other securities such as preferred shares and common shares. Debt securities are usually issued in the form of bonds (government bonds, corporate bonds), certificates of deposit, mortgaged securities, etc. Currently, this type of securities has a fairly large number of transactions on the stock market.
Hybrid securities
You may have heard some of the terms bonds…. It is considered a form of hybrid security, it has characteristics of both equity and debt securities. However, this type of securities still tends to favor debt securities (bonds).
Derivative securities
A derivative is a financial contract established to confirm the rights and obligations between two parties at the present time, regarding a transaction to be performed at a specified time in the future. Usually, derivative securities always have a much higher level of risk than common securities.
Derivative securities include 4 main types:
Forward Contract (Forward)
Futures contract (Future)
Option contract (Option)
Swap Contract (Swap)Example :
ABC stock currently has a price of 50,000 Rs, you predict in the future it will increase to 60,000 Rs. Instead of spending 50,000 Rs to buy ABC Stock with the expectation of profit of 10,000 Rs (equivalent to 20%). You could exercise a covered warrant to buy 50 shares at a (assuming) cost of Rs1,000/share. When ABC Stock increases in price to Rs 60,000, the interest you receive is:
50 (ABC shares)*(10,000 Rs (interest/share) – 1,000 Rs (cost of buying rights/share)) = 450,000 Rs.
Risk rating of Securities:
Theoretically, the types of Securities, when considered in terms of decreasing risk, we get:
Riskiest: Derivatives.
Risks: Equity securities – stocks.
Least risky: Debt securities – bonds.
Features of Securities
Liquidity
Securities have the ability to convert into cash more quickly than other assets, which is reflected in their ability to trade on the secondary market. Different types of securities have different transferability, but listed stocks have better liquidity than other securities.
Calculate Risk
Typically, each financial product carries a different level of risk, as is the case with securities. In addition, there are market risks, inflation and political risks that have a direct impact on this financial asset class.
Profitability
A security is a financial asset that an investor who owns is expected to receive a larger income in the future. This income is mainly obtained from dividends distributed or an increase in the price of securities in the market
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