The Indian stock market is the most dynamic financial market in the world, and growing rapidly. It has offered a number of types of securities to its investors that may be traded either on all India-based stock exchanges like the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) or over the counter. They are either a stake in a company or financial contracts that derive value from an underlying asset. Knowledge of the kinds of securities present in the Indian stock market will be important for investors because each kind comes with its inherent set of risks, returns, and trading mechanisms.
We will, therefore, discuss in this blog post the various types of securities found in the Indian stock market, which range from equities to debt securities, derivatives, and mutual funds, among others.
1. Equity Securities (Stocks)
The most common terminology used for equity securities is stocks or shares. An equity share in a company represents a part of the ownership in that company. Buying shares of any company thus does result in becoming a part owner of the company and can subsequently demand some sort of share from the declared profits in form of dividend at specific points in time. Equity shares are one of the most widely followed investment avenues in the Indian equity market.
Key Features:
Ownership: Owners of a company are shareholders with voting rights at shareholder meetings.
Capital Gains: The gain from owning equities is the potential benefit of capital appreciation—or, on the positive side, appreciation in the stock’s value over time.
Dividends: Companies can distribute dividends to shareholders as part of their income.
Volatility: The highs and lows of stock prices can be extreme, making equities more volatile but also potentially more rewarding.
Equity Securities
Common Stocks: Most common form of equity, which represents ownership in a company and entitles the shareholder to vote on company matters.
Preferred Stocks: These stocks usually pay dividend yields at a fixed rate and, upon liquidation, are paid preferentially over common stocks. However, preferred stocks typically do not carry voting rights.
Reputed Stock Indices:
Sensex: It consists of 30 large-cap companies from different industries, which is taken as the benchmark of BSE.
Nifty 50: Nifty 50 is used as the benchmark of NSE, consisting of 50 large-cap companies traded on the exchange.
2. Debt Securities (Bonds)
A debt security is nothing but a money-borrowing instrument. When one buys a bond or any other debt security, he or she virtually lends money to the corporation, government, or any other entities. It promises to pay back the principal amount along with interest in pre-specified intervals that are commonly semi-annual and annual. In other words, the issuer of the security promises to pay off the nominal amount at maturity along with the accumulated interest.
Important Features:
Fixed Returns: Debt securities are highly valued due to the fixed interest income earned therefrom (coupon payments), and they are relatively less risky than equities.
Maturity Date: A bond has a date of maturity, after which the same amounts the investor provides will be returned to him.
Credit Risk: Bonds expose the investor to the potential default risk of the issuer in making payments; therefore, bonds are rated based on creditworthiness.
Types of Debt Securities in India:
Government Bonds: These are issued by the central government or state governments, and they’re low-risk investments. Government Savings Bonds and Treasury Bills, or T-Bills, fall into this category.
Corporate Bonds: Corporate bonds are issued by corporations and pay higher interest rates than government bonds due to a greater risk.
Municipal Bonds: These are issued by local governments or municipalities as a source for funding infrastructural projects. Even there are some cases where municipal bonds carry tax advantages.
Convertible Bonds: They are convertible bonds, a type of bond that may be exchanged for a fixed number of shares in the issuing company. Thus, it is a hybrid investment that incorporates some characteristics of debt securities and equity.
Popular Bond Indices:
CRISIL Composite Bond Index: It is the benchmark index to monitor the performance of the Indian bond market.
3. Derivatives
Derivatives are financial contracts whose value is derived from the price of some underlying asset. This underlying asset can be a stock, index, commodity, currency, or bond. Through derivatives, investors can hedge their positions or speculate in the price movements of the underlying asset without necessarily owning the said asset itself.
Major Features:
Hedging: Through derivatives, one can hedge against potential price movements in the underlying asset.
Speculation: The investor can take positions on the prices to benefit from market volatility.
Leverage: Derivatives offer a leverage whereby the investor controls a large position using a small investment that amplifies potential profits and risks.
Types of Derivatives:
Futures Contracts: These are agreements to buy or sell a given asset at a predetermined price on a definite date later in the future. Futures contracts can be applied in hedging as well as in speculative purposes.
Options Contracts: An options contract holder has an option but not an obligation to buy an underlying asset at a stipulated price within a stated period. Options may be used for hedging, income generation or speculation.
Swaps: It is the agreement between two parties to exchange future cash flows or liabilities on a specified financial asset or an index.
Popular Derivatives in India:
Index Futures: Agreements based on the performance of indices such as Nifty and Sensex.
Stock Options: Options based on individual stocks traded on NSE or BSE.
4. Mutual Funds
A mutual fund is an investment vehicle that pools money from several investors to invest in a diversified mix of stocks, bonds, or other securities. Mutual funds employ professional fund managers to do the job, thus appealing to investors who do not want the responsibility of selecting individual securities.
Key Characteristics:
Diversification: Investors automatically get diversification in mutual funds, thereby spreading risks linked with individual investments in specific stocks or bonds.
Liquidity: Mutual fund units can be bought or sold on any working day at net asset value (NAV).
Professional Management: The mutual fund managers constantly manage the portfolio of the fund depending upon the changing market situation and investment goal.
Types of Mutual Fund available in India.
Equity Funds: Invest mainly in stocks, with the primary objective being generating significant capital appreciation.
Debt Funds: Invest in bonds and other fixed-income securities, where the primary objective is to generate regular income with relatively lower risk.
Hybrid Funds: Investment in the mix of equities and bonds to provide an all-rounded approach of capital appreciation and income generation.
Exchange-Traded Funds (ETFs): These are somewhat similar to mutual funds but trade on the stock exchange, just like stocks. It replicates an index, commodity, or sector.
Popular Mutual Funds:
HDFC Equity Fund
SBI Bluechip Fund
ICICI Prudential Bond Fund
5. Exchange-Traded Products (ETPs)
ETPs include ETFs and ETCs, and they represent a category of securities that track the performance of an underlying asset, which can be a stock index, a commodity, or a bond. They are traded on the stock exchanges the same as stocks.