4.2 Products Dealt In The Secondary Markets

SECONDARY MARKET PRODUCTS

Following are the main financial products/instruments dealt in the secondary market:

• Equity Shares:
  An equity share or ordinary share also represents the form of fractional ownership in a company.
• Rights Issue / Rights Shares:
  The issue of new securities to existing shareholders at a ratio to those already held.
• Bonus Shares:
  Shares issued by companies to their shareholders free of cost by capitalization of accumulated reserves from the profits earned in the earlier years.
• Preferred Stock / Preference Shares:
  Owners of these kinds of shares are entitled to a fixed dividend or dividend calculated at a fixed rate to be paid regularly before dividend can be paid in respect of equity share.
• Cumulative Preference Shares:
  A type of preference share on which dividend accumulates if remains unpaid.
• Cumulative Convertible Preference Shares:
  A type of preference share wherein 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.
• Security Receipts:
  Security receipt means receipt or other security issued by a securitisation company or 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 asset involved in 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. These securities have a fixed coupon that is paid on specific dates on a half-yearly basis. These securities are available in wide range of maturity dates - from short-dated (less than one year) to long-dated (up to 20 years).
• Debentures:
  Bonds issued by a company bearing a fixed rate of interest usually payable half yearly on specific dates and principal amount repayable on a particular date on redemption of the debentures. Debentures are normally secured / charged against the assets of the company in favour of the debenture holder.
• Bond: A debt security is generally issued by a company, municipality or government agency. A bond investor lends money to the issuer and in exchange the issuer promises 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:
  1. Zero Coupon Bond:
     Bond issued at a discount and repaid at a face value. No periodic interest is paid. The difference between the issue price and redemption price represents the return to the holder. The buyer of these bonds receives only one payment on the maturity of the bond.
  2. Convertible Bond:
     A bond giving the investor the option to convert the bond into equity at a fixed conversion price.
  3. Commercial Paper:
     A short-term promise to repay a fixed amount that is placed in the market either directly or through a specialised intermediary. Commercial paper is a money market instrument issued normally for a tenure of 7 days to one year.
  4. Treasury Bills:
     Short-term (up to 364 days) bearer discount security issued by the government as a means of financing its cash requirements.

However, even though all the above instruments are dealt in the secondary market, we shall mainly focus on equity shares in this course.