Some say the stock market is a financial maize, but for others, it’s a fortune builder.
If you are a newbie or cautious investor willing to invest in shares and securities for the first time, knowing the types of securities available in the Indian stock market can help you take the right investment-related decision.
You’d be surprised to know that many types of securities are available in the Indian stock market! But before we take a look at examples of securities and their meaning, let’s first understand the meaning of the term securities in the context of investment.
Securities – an overview
Securities refer to the types of financial instruments used by public limited companies to raise funds from the general public. Every time a listed company needs funds for its business expansion, it raises the necessary funds from the common public through the issuance of equity securities and other instruments.
Interested investors who are willing to invest in the company can buy these securities to become one of the company’s investors or shareholders. However, all investors of a company are not its shareholders and don’t necessarily represent the ownership capital. The type of securities that the investor holds actually determines their role in it.
Now you must be curious to know the types of securities that investors can invest in.
Types of Securities
Securities in the context of investment are broadly classified into four types:
1. Equity Securities
Equity securities are also called equity shares and stocks. Any investor can be a shareholder of a company by investing in its equities. For example, if you invest in ABC company and buy its 10 shares, you’ll become a shareholder of the company.
When the company makes a profit, you’ll become eligible to receive dividends. You can also sell the whole or a part of these securities (when the market is bullish) through your broker. There is no restriction on that.
Shareholders also have voting rights through which they can exercise their limited control over the company’s affairs, through their voting. But they also have to bear the risk of capital loss during the time of the liquidation of the company or when the share price of the company goes down.
2. Debt Securities
Companies issue various debt securities namely, debentures, bonds, fixed deposits etc for the general public/ investors from time to time. Through the issuance of debt securities, the company borrows a certain amount of money from the public for a particular period (also called the lock-in period).
During a lock-in period, an investor wouldn’t be allowed to withdraw the amount of invested money. But after the completion of the maturity period, investors will get the full amount of investment plus a fixed rate of interest on it.
Some of the popular debt security instruments issued by the government are Certificate of Deposits (CD), government bonds, treasury bills, etc. Debt securities are less volatile and help companies to raise the necessary funds for meeting their financial needs.
Investors who are looking for a fixed rate of interest and can part away with their funds for a few years can invest in debt security instruments.
3. Hybrid Securities
Hybrid security instruments have the characteristics of both equity and debt. Some of the common types of hybrid securities are convertible bonds (which can be converted into stock after a specific time period), warrants (which allow shareholders to buy stocks at a specified price within a specific timeframe), and preferred shares.
But all hybrid securities come with a different set of terms and conditions. Depending upon the investors’ needs and financial goals, they can carefully invest in hybrid securities.
In a nutshell, securities refer to the financial instruments issued by the listed companies to raise funds from the common public for the fulfilment of a specific goal, such as business expansion, the launch of a new product, or when the company wants to completely rejig its set-up and infrastructure.
Security instruments do have their own merits and demerits. Equity securities are most flexible as you can sell them anytime on a stock exchange through your broker. But for investing in derivatives, debt securities, and hybrid instruments, a few years of experience is recommended.