A Quick Note on Types of Securities: Ordinary

In simple words, the term security can be defined as a type of financial instrument holding some monetary value that is put up by a company in the stock market to be bought and sold. These are mostly prepared to raise capital for the company through the public. Some common examples of securities are shares, stocks, or bonds of a company. The trading of securities in the Indian securities market is regulated by the SEBI (Securities Exchange Board of India) which operates under the Ministry of Finance in India. 

There are 3 types of securities – equity securities, debt securities, and hybrid securities. This article contains information about these types of securities. 

Equity Securities

Equity securities include shares and stocks of a company. A company’s capital is divided into various small units and each such unit is a share. The monetary value of these shares is called equity. Thus, equity securities represent the ownership of a company. This means that if you own the share of a company, then you have become one of the shareholders or owners of that company. 

Possessing equity securities has various benefits – higher dividends, voting rights, control over the company’s decisions, claim over the assets of the company, etc. A major benefit of owning equity securities is its liquidity. This means that in case of emergency, the securities can be easily sold off for cash in the stock market. 

Debt Securities

As the name suggests, debt securities are borrowed funds of a company that are used to raise capital from the public. These instruments are issued by a company in the form of bonds, debentures, treasury bills etc. to lenders for a certain period of time in exchange of an amount. 

Debt securities have a fixed rate of interest called a ‘coupon rate’. This is paid upon the maturity of the issue along with the principal sum. Debt securities are negotiable in nature, which means that the funds can be transferred from one party to another upon agreement. These instruments are generally considered as low-risk investments and hence, guarantee a certain fixed percentage of return. 

Types of Debt Securities

There are various types of debt securities or instruments available in India for investment purposes. Some of these are as follows – 

1. Bonds

Bonds are a type of debt securities that guarantees an investor the return of the principal amount along with the agreed interest at the end of the maturity period. A bond is issued to the lender equivalent to the value of the money lent to the issuing institution. These form the most popular and commonly used debt instrument. Bonds are generally long term in nature.

1. Debentures

A debenture is a type of bond that is unsecured in nature. In simple terms, it works in the same way as a bond except that there are no collaterals associated with it. To substitute for that, only reputable companies with a promising goodwill are known to issue successful debentures. Debentures also hold the feature of convertibility which means that the debenture holder can convert their debenture into the shares of the company of equal value.

1. Commercial Papers

Commercial papers form unsecured debt securities with a fixed maturity period that should not exceed 270 days. Thus, these are short-term lending instruments and are often issued at a discount from face value. 

1. Certificates of deposit

Certificates of deposit are a form of debt instrument that are issued by financial institutions and banks. These provide a high rate of interest for depositing a certain sum of money in your bank account for a fixed period of time. The issue of CDs is done in a dematerialized format, with the help of a demat account in an electronic format. 

1. Bills of exchange

Bills of exchange is nothing but a note that orders one party to pay a specified sum of money to another party at either a fixed date or upon demand. It is legally binding in nature and involves three parties – the drawer of the bill, the drawee (party that is supposed to pay the amount) and the payee (party that is to receive the amount). 

Hybrid Securities

Hybrid securities are a combination of two or more types of securities (in most cases both equity and debt) and thereby enjoy the benefits associated with all. Some examples can be preferred stocks, convertible bonds and more. Some common features of hybrid securities include higher rates of return, fixed returns etc. 

Money Market Securities

Money market securities are composed of various short-term instruments that are highly liquid in nature. These differ from ordinary stock market instruments in the sense that money market securities have a maturity period of 1 year or less. These include treasury bills, commercial bills, certificate of deposit, commercial paper, call money etc. The risk associated with these securities is comparatively lower because of the short term maturity period. 

Conclusion

A security is a type of financial instrument holding some monetary value that is put up by a company in the stock market for trading. These include equity, debt and hybrid securities. Debt securities are borrowed funds of a company that are used to raise capital from the public. The major types of debt securities are bonds, debentures, commercial papers, certificate of deposit and bills of exchange. Money market securities are short term instruments with high liquidity.