Stock Market Securities: Equity, Bonds, Warrants, Mutual Funds, and ETFs

Stock Market, a place that connects investors with surplus cash to companies in need of cash for business activities, though looks simple but it is not that straight forward. There are various kinds of securities that can be issued for raising funds. We will discuss these types of securities, risks, and benefits involved in each of them. 

Equity Shares

Equity shares are issued by companies and it represents fractional ownership of the company. In simple terms, if one buys equity shares of a company, he becomes a partner. Owners of all equity shares collectively own the company. 

Individual or institutional investors can participate in equity investments and they enjoy the benefits of owners. Benefits to equity investors lie in profits (may be shared as dividends) and growth (may reflect in price) of the company. In short, if the company performs well equity shareholders get benefited.   

The risk involved in equity investment is also very similar to its benefits. If the company performs poorly it will not be in a position to pay dividends and at the same time, poor performance will decrease share prices causing loss of capital to investors.  

All activities related to equity investment are regulated by SEBI.

Debentures/Bonds/Notes

Debentures are nothing but contracts of loan stating all terms related to the loan agreement. Debentures or bonds can be issued by companies or governments. The seller/issuer of debentures is liable to pay buyer/investor according to terms specified while issuing such securities.

There are various kinds of dentures available in the market e.g. Convertible, Non-convertible, Partially convertible. Here convertible means such debentures can be converted into equity shares of the company. The terms for conversion are specified while issuing debentures. 

The risk and benefits involved in convertible debentures are partially dependent on the company's performance and partially on interest rates and inflation rates. In the case of non-convertible debentures both risk and benefits are fully dependent on interest rates and inflation rates.

Activities related to issue and redemption of debentures are regulated by SEBI and RBI.

Warrants

Warrants are rarely used security which can be issued by companies. Warrants are an option to buy the equity of the issuing company at a specified price on the specified date.

Any individual or institution can opt for investing in warrants. The risk and benefit involved in warrants are purely dependent on the price of equity shares on the date specified on the warrant.

Activities related to warrant issues are regulated by SEBI.

Mutual Fund Units

Mutual fund units are issued by Asset Management Companies(AMCs) for the purpose of pulling money from the mass population to buy a portfolio of securities with a common objective of wealth creation. Mutual funds help know nothing investors to invest in the securities market through a well-qualified team of professional investors. 

Each investor's share is represented by units issued by AMC. The price of each unit is called net asset value(NAV) which keeps changing every day based on price change in the portfolio of securities.

Changes in NAV directly represent gains or losses to investors. Mutual fund units portfolio may consist of equity share, commodities, debentures, or combination of all based on the type of mutual fund scheme, hence benefits and risks involved may also be a combination of all such securities.

Understanding various types of mutual funds will take long discussion so we will discuss it in a future post.

Exchange-Traded Funds(ETFs)

Exchange-traded funds are a pool of money to tack prices of certain commodities or indices. The main feature of such funds is they are traded on stock exchanges similar to equities. The most popular ETFs in Indian stock exchanges are Gold, Nifty, and Sensex tracking ETFs. Such ETFs are issued by mutual funds and any individual or institutional investor can invest in it. All regulatory measures are taken care of by RBI and SEBI.

ETFs provide benefits of the diversity of index funds along with tradeability at realtime prices.

These are a few basic products in the securities market I hope you understood all these terms if you have any doubt please feel free to ask in the comment section.

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