NISM SERIES – XV: RESEARCH ANALYST CERTIFICATION BY- CA NITIN GURU

Chapter 2: Introduction to Securities Market

 Introduction to Securities and Securities Market
Securities are transferrable financial instruments or contracts that show evidence of indebtedness or
ownership interest in assets of an incorporated entity. These include equity shares, preference shares,
debentures, bonds and other such instruments. The efficacy of security in allowing movement of capital
is achieved through an efficient securities market that allows investors and sellers to buy and sell
securities. These markets help in transfer of resources from those with idle or surplus resources to
others who have a productive need for them.
Financial markets consists of:
(1) Investors (buyers of securities)
(2) Borrowers/Seekers of funds (sellers of securities)
(3) Intermediaries (providing the infrastructure to facilitate the transfer of funds and securities)
(4) Regulatory bodies (responsible for orderly development of the market)

“Securities” has been defined in the section 2(h) of Securities Contracts (Regulations) Act, 1956 (SCRA).
Securities include:
(1) Shares, scripts, stocks, bonds, debentures, debenture stock
(2) Derivative
(3) Units of any other instruments issued by an collective investment scheme
(4) Security receipts as defined in clause (zg) of Section 2 of the Securitization and Reconstruction of
Financial Assets and Enforcement of Security Interest Act, 2002
(5) Units issued to the investors under any mutual fund scheme
(6) Any certificate or instrument issued to an investor by an issuer being a special purpose distinct
entity.
(7) Government securities.
(8) Such other securities as may be declared by the Central Government to be Securities and
(9) Rights or Interest in securities

 Equity Shares
Issued by : Companies
Investors : Institutional and Individual (Retail & HNI)
Medium : Direct issuance by companies and Stock Exchange
Regulator : SEBI, Regulators under the Companies Act
Equity shareholders collectively own the company.

 Debentures/Bonds/Notes
Issued by : Companies, Government, Special Purpose Vehicles (SPVs)
Investors : Institutional and Individual
Medium : Direct issuance by issuers and Stock Exchange
Regulator : RBI, SEBI, Regulators under the Companies Act
There is variety of debentures/bonds such as:

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(1) Full Convertible Debentures are fully convertible into ordinary share
(2) Partly Convertible Debenture (PCDs) are partly convertible into ordinary share
(3) Non-Convertible Debenture (NCDs) are pure debt instruments

Short term debt instruments are used to raise debt for periods not exceeding one year. These instruments
includes Treasury Bills issued by the government, Commercial Papers issued
 Foreign currency bonds
Issued by : Companies, Government, Special Purpose Vehicles (SPVs)
Investors : Institutional and Individual
Medium : Direct Issuance by issuers and Stock Exchange
Regulator : Regulator is the respective country of issue
Bonds issued by a company in a currency that is different from the currency of its home country. In
February 2020, Delhi International Airport Limited (an SPV of GMR Infrastructure Limited) issued USD
bonds. These bonds create significant foreign currency risk to the issuer.

 External Bonds/Masala Bonds

Issued by : Companies, Government, Special Purpose Vehicles (SPVs)
Investors : Institutional and Individual
Medium : Direct issuance by issuers and Stock Exchange
Regulators : Regulators in the respective country of issue
External bonds, also referred as Euro bonds, are bonds issued in a currency that is different from the
currency of the country in which it is issued. For example, if a company issues a US dollar denominated
bonds in Kuwait, it would be referred as an Euro bond as the currency of the bond (USD) is different from
currency of the country in which it is issued (Kuwaiti Dinar).
External bonds denominated in Indian rupee (INR) are referred as Masala bonds. These bonds are issued
outside of India but are denominated in Indian Rupees. Masala bonds were issued for the first time in
November 2014 by International Finance Corporation and was listed in the London Stock Exchange.

 Warrants and Convertible Warrants

Issued by : Companies
Investors : Institutional and Individuals
Medium : Direct Issuance by companies and Stock Exchange
Regulator : SEBI
Warrants are options that entitle an investor to buy equity shares of the issuer company after a specified
time period at a pre-determined price.

 Indices
A market index tracks the market movement by using the prices of a small number of shares chosen as a
representative samples. Most leading indices are weighted by market capitalization. Stocks included in an
index are also quite liquid. Narrow indices are usually made up of the most actively traded equity shares
in that exchange. The most widely tracked indices in India are the NSE’s Nifty 50, S&P BSE Sensex and
MSEI’s SX40. The S&P Sensex has been computed as the market cap weighted index of 30 chosen stocks
on BSE.

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Major uses of indices are :

(1) The index can give a comparison of returns on investments in stock markets as opposed to assets
classes such as gold or debt.
(2) Comparison of performance with an equity fund, a stock market index can be the Benchmark.
(3) Performance of the economy is indicated by the index.
(4) Real time market sentiments are indicated by indices.
(5) Indices acts as an underlying for Index funds, Index Futures and Options.

 Mutual Fund Units

Issued by : Mutual Funds
Investors : Institutional and Individual
Medium : Direct issuance by mutual funds and Stock Exchange
Regulator : SEBI, RBI
Mutual funds pool together the money contributed by investors. The value of unit, called the Net Assets
Value (NAV). AN open- ended scheme offers the investors an option to buy units from the fund at any
time and sell the units back to the fund at any time.

 Exchange Traded Funds (ETFs)

Issued by : Mutual Funds
Investors : Institutional and Individual
Medium : Direct issuance by mutual funds and Stock Exchange
Regulator : SEBI, RBI
Exchange Traded Fund (ETF) is an investment vehicle that invests funds pooled by investors to track an
index, a commodity or a basket of assets. It is similar to an index funds in the sense that its portfolio
reflects the index it tracks. But, unlike an index fund, the units of the ETF are listed and traded in demat
form on a stock exchange and their price changes continuously to reflect changes in the index or
commodity prices. ETF is a passively managed portfolio.

 Hybrids/Structured Products:

 Preference Share
Shares which have preference over common/ordinary equity shares at the time of dividend and at the
time of repayment of capital in the event of winding up of the company. Dividend payment is not an
obligation. Preference shares do not carry voting rights. Preference share resemble debt instruments
because they offer pre-determined rate of dividend. There are variety of preference shares –
cumulative (unpaid dividend is carried forward), non-cumulative (unpaid dividend lapses), convertible
partly or fully etc.

 Convertible Debentures & Bonds

(1) Fully convertible debentures (FCD)
(2) Partly convertible debentures (PCD)
(3) Optionally Convertible Debentures (OCDs) – Convertible into equity shares at the discretion of
debenture holders, who may choose to convert them into equity.

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The advantage to the issuer of convertible debentures lies in the fact that convertible debentures
usually have a lower coupon rate than pure debt instruments.

 Indian Depository Receipts (IDRs), Global Depository Receipts (GDRs) and American Depository Receipts
(ADRs)
Depository Receipts (DRs) are a financial instrument that represents shares of a foreign company. These
depository receipts trade in the local market (in which it is issued) and are denominated in local
currency.
Process of issuing a depository receipts is as follows: (i) A company or an investor delivers a specific
quantity of equity shares to a bank (ii) The bank places the security in its custodian account in the
country where the company is domiciled (iii) The bank then issues a certificate (depositary receipts)
against such shares to investors in the overseas market.
If the issuing company is the one that delivers the securities and initiates the process, it is referred as
sponsored depositary receipts and they can be listed in the exchanges of the country in which the DRs
are issued. If the shares are delivered by the investors they are referred as unsponsored depository
receipts. Unsponsored DRs are not allowed to be traded in the stock exchanges. They can be traded
only in OTC markets. They also have less regulatory requirements. Indian companies are permitted to
raise foreign currency resources in the form of issue of ordinary equity shares through depository
receipts. Foreign companies are also allowed to raise equity capital from India through IDRs. SEBI has
laid down the guidelines to be followed by the companies for IDRs.
Some of the country specific depository receipts include:

 American Depository Receipts (ADRs)

These depositary receipts issued and traded in U.S.A that are issued by a non-US company. ADRs are
one of the most popular depository receipts and many companies across the world have issued ADRs.
Some of the Indian companies across the world have issued ADRs. Some of the Indian companies that
have issued ADR include Infosys, Wipro, ICICI Bank and HDFC Bank.

 Indian Depositary Receipts (IDR)

DR issued and traded in the Indian market by a non-Indian company is referred as IDR. Depositary
receipts of Standard Chartered Bank are traded in the Indian Stock market in the form of IDR.

 Hong Kong Depository Receipts (HKDR)

HKDRs refer to depository receipts issued by a non-Hong Kong company that are traded in the Hong
Kong market.

 Global Depository Receipts (GDRs)

These refer to depositary receipts that are allowed to be traded in more than one country. Typically,
GDRs are preferred to be issued in the European Union member states as commonality of the
regulations make it easy for issuing companies to comply with the regulations across the region.
Holding DRs give investors the right to dividends and capital appreciation from the underlying shares,
but no voting rights.

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 Foreign Currency Convertible Bonds (FCCBs)

FCCBs or Foreign Currency Convertible Bonds are foreign currency (usually dollar) denominated
convertible debt papers issued by companies in international markets. Generally optionally converted
and issued offshore in different denomination under guidelines as defined by Reserve Bank of India
(RBI) from time to time. The payment of interest and repayment of principal (if happens) on these
bonds is in foreign currency.

 Equity Linked Debentures (ELDs)

Equity Linked Debentures (ELDs) are floating rate debt instruments whose interest is based on the
returns of the underlying equity assets such as Nifty 50, S&P Sensex, individual stocks or any
customized basket of individual stocks. The issuer of bond invests a pre-determined part of the
principal amount collected in fixed income securities like bonds, which provide principal protection
while the balance is used to buy options which provide the exposure to returns of equity. These
instruments still carry credit risk and accordingly rated by credit rating agencies.

 Commodity Linked Debentures (CLDs)

CLDs are floating rate debt instruments whose interest is based on the returns of the underlying
commodity assets. While the returns can be linked to any commodity, most of these papers globally are
linked to precious metals - Gold and Silver. Like ELDs, the advantages of CLDs is that they provide the
investor an opportunity to earn return from the community markets while protecting their initial
capital.

 Mortgage Backed securities (MBS) and Assets Backed Securities (ABS)

Debt instruments issued by the institutions against the receivables and cash flows from financial assets
such as home loans (MBS), auto loans , rent receivables, credit card receivables and others. The issuer is
able to create liquidity in an otherwise illiquid asset by securitizing them.

 REITs/InvITs
Real Estate Investment Trust (REITs) and Infrastructure Investment Trusts (InvITs) are investment
vehicles that pool money from various investors and invest in revenue generating real estate projects
and infrastructure projects, respectively. They issue units to the investors to raise money. They enjoy
favorable tax treatment as long as they meet the necessary regulatory requirements. In Case of REITs,
80% of the assets should be held in the form of real estate asset. For InvITs, regulation stipulates that
90% of the unit capital should be invested in revenue generating infrastructure projects. The trust has
to distribute at least 90% of distributable surplus cash flow to the unit holders.

 Commodities
Commodities are the basic materials or goods that are largely homogenous in nature. These goods are
interchangeable with the other goods of same type. Thus, a bar of gold is a commodity while a jewellery
made of that gold is not a commodity. Commodities may be hard or soft. Hard commodities are essentially
natural resources that are mined or extracted. All types of metals and crude oil. Some commodities on the
other hand refers to commodities that are grown i.e. agricultural products. Some commodities include
grains and pulses.

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 Precious Metals
Precious metals such as gold or silver are viewed as an investment that can help preserve real value of
money. Storage cost on these metals is very small compared to their values.

 Commodity ETFs
Commodity ETF is an exchange traded fund that invests the pooled investment in a range of physical
commodities. Since the storage is handled by the fund, the investors do not have any storage
obligation.

 Managed Future contract

Future contract is a contract to buy or sell an asset at specified future date at a specific price. Since the
price of the contract is pre-determined, the buyer of the contract tends to gain if the price of the
product increases in future. Managed future contract refers to a portfolio of futures contract that are
actively managed by professionals.

 Warehouse Receipts
Document that shows proof of ownership of goods that are stored in a warehouse. Most of these
warehouse receipts are negotiable. The title to the underlying goods can be transferred by simply
transferring the receipts.

 Structures of securities Market

Primary Market-The Primary market, also called the new issue market is where issuers raise capital by
issuing securities to investors. Fresh securities are issued in this market.
Secondary Market- The secondary market facilitates trade in already-issued securities, thereby enabling
investors to exit from an investment or new investors to buy the already existing securities.
Ways to issue securities-

 Primary Market
Used by companies (issuers) for raising fresh capital from the investors. Primary market offerings may be
a public offering or an offer to a select group of investors in a private placement program .

Public issue – Securities are issued to the members of the public, and anyone eligible to invest can
participate in the issue. This is primarily a retail issue of securities.

Initial Public Offer (IPO)- An initial public offer of shares or IPO is the first sale of a corporate’s commom
shares to investors at large.

SEBI regulation also specifies the proportion of shares to be allocated to different classes of shareholders.
According to it, in an eligible issue, at least 35% of shares should be allocated to retail investors. In 2009,
SEBI also introduced the concept of anchor investor. Anchor investor” means a qualified institutional
buyer who makes an application for a value of ten crore rupees or more in a public issue made through
the book building process. Anchor investors can be allocated up to 60% of the portion allocated to QIBs.

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Bidding for them opens one day before the IPO open for public subscription. The allocation price for
anchor investors can be lower than the final issue price determined through the book building process.
The volume and value of anchor subscription serve as an indicator of the quality of the offer.

Follow on Public Offer (FPO)- When an already listed company makes either a fresh issue of securities to
the public or an offer for sale to the public, it is called FPO.

Private Placement- It refers to issuing large quantity of shares to select set of investors. The number of
investors to whom shares are issued under private placement should not exceed fifty.

Qualified Institutional Placements (QIPs)- Qualified institutional Placement (QIPs) is a private placement
of shares made by a listed company to certain identified categories of investors known as Qualified
Institutional Buyers (QIBs). QIBs include financial institutions, mutual funds and banks among others.

Preferential Issue- Preferential Issue means an issue of specified securities by a listed issuer to any select
person or group of person on a private placement basis. The issuer is required to comply with various
provisions defined by SEBI.

Rights and Bonus Issues- Securities are issued to existing shareholders of the company as on a specific cut-
off date, enabling them to buy more securities at a specific price. Companies can issue bonus share only if
they have sufficient amount of retained earnings.

Onshore and Offshore Offerings- Issuers can either issue the securities in the domestic market and raise
capital or approach investor outside the country. If capital is raised from domestic market, it is called
onshore offering and if capital is raised from the investors outside the country, it is termed as offshore
offering.

Offer for Sale (OPS)- An Offer for Sale (OPS) is form of share sale where the shares offered in an IPO or
FPO are not fresh shares issued by the company, but an offer by existing shareholders to sell shares that
have already been allotted to them. The disinvestment program of the Government of India, where the
government offers shares held by it in Public Sector Undertakings (PSUs)

Sweat Equity- A company may issue shares to its employees, promoters, technocrats, or others as reward
for their contribution to the company. These shares are referred as sweat equity.

Employee Stock Option Scheme (ESOPs)- ESOPs are instruments given by a company to its employees that
give them an option to buy the shares of the company at pre-determined price after a period of time
(referred as vesting period).

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 Secondary Market

Over-The-Counter Market (OTC Market)- OTC markets are the markets where trades are directly
negotiated between two or more counterparties. In this type of market, the securities are traded and
settled over the counter among the counter among the counterparties directly.

Exchange Traded Markets- The other option of trading in securities is through the stock exchange route,
where trading and settlement is done through the stock exchanges. The trades executed on the exchange
are settled through the clearing corporation.

Trading- A formal contract to buy/sell securities is termed as trading. As defined above, trading can be
done either in the Over-The Counter (OTC) market or the Exchange Traded Market. Stock exchanges in
India feature an electronic order-matching system that facilities efficient and speedy execution of trades.

Clearing and Settlement- Clearing activity is all about ascertaining the net obligations of buyers and sellers
for a specific time period. Settlement is the next step of settling obligations by delivering shares (by the
seller) and paying more (by the buyer). The details of all transactions performed by the brokers are made
available to the Clearing house by the Stock exchange.

Risk Management- In OTC transaction, counterparties are expected to take care of the credit risk on their
own. In exchange traded world, To handle this risk, the clearing corporation charges various kinds of
margins, most prominent among these margins are initial or upfront margin and mark to meet (MTM)
margins. Initial margin is a percentage of transaction value arrived at based on concept of “Value at Risk”
philosophy and MTM margins is the notional loss which an outstanding trade has suffered during a
specified period on account of price movements.

 Market Intermediaries:

Stock Exchanges- Stock Exchanges provide a trading platform where buyers and sellers can transact in
already issued securities. Stock markets such as NSE, BSE and MSEI are nationwide exchanges.

Depositories- Depositories are institutions that hold securities (like shares, debentures, bonds,
government securities, mutual funds units) of investors in electronic form. Currently there are two
depositories in India that are registered with SEBI:
1. Central Depository Services Limited (CDSL), and
2. National Securities Depository limited(NSDL)

Depository Participant- A Depository Participant (DP) is an agent of the depository through which it
interfaces with the investors and provide depository services. Depository participants enable investors to
hold and transact in securities in the dematerialized form. Depository Participants are appointed by the
depository with the approval of SEBI.

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Trading Members- Trading members or Stock Brokers are registered members of a stock Exchange . They
facilitate buy sell transactions of investors on stock exchanges. All secondary market transactions on stock
exchanges have to be essentially conducted through registered brokers of the stock exchange.
A sub-broker is an entity who is not a member of Stock Exchange but who acts on behalf of a trading
member or Stock Broker as an agent for assisting the investors in buying, selling or dealing in securities
through such trading member or Stock Broker. Broker receives a commission for their services, who is
known as brokerage.

Authorized Person – Authorized person is any person (individual, partnership firm, LLP or body
corporate), who is appointed by a stock broker or trading member as an agent to reach out to the
investors scattered across the country.

Custodians – A custodian is an entity that is charged with the responsibility of holding funds and securities
of its large clients, typically institutions such as banks, insurance companies and foreign portfolio
investors.

Clearing Corporation- Clearing agencies ensure that members on the members on the Stock Exchange
meet their obligations to deliver funds or securities.

Clearing Banks- Every clearing member needs to maintain an account with the clearing bank. It is the
clearing member’s responsibility to make sure that the funds are available in its account with clearing
bank on the day of pay-in to meet the obligations arising out of trades executed on the stock exchange.

Merchant Bankers- Merchant Bankers are entities registered with SEBI and act as issue managers,
investment bankers or lead managers. They help an issuer access the security market with an issuance of
securities. They are single point contact for issuers during a new issue of securities. They engage and co-
ordinate with other intermediaries such as registrars, brokers, bankers, underwriters and credit rating
agencies in managing the issue process.

Underwriters- Underwriters are intermediaries in the primary market who undertake to subscribe any
portion of a public offer of securities which may not be bought by investors. When the underwriters make
their commitments at the initial stages of the IPO, it is called hard underwriting. Soft underwriting is the
commitment given once the pricing is determined.

 Institutional Participants
Institutional Investors comprise domestic financial institution, banks, Insurance Companies, Mutual Funds
and Foreign Portfolio Investors. Some of them are defined here in brief:

Foreign Portfolio Investors (FPIs)- A Foreign Portfolio Investor (FPI) is an entity established or incorporated
outside India that proposes to make investments in India. These International investors must register with
the regulator- Securities and Exchange Board of India (SEBI) to participate in the Indian Securities Market.

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P-Note Participants- Participatory Notes (P-Notes or PNs) are instruments issued by SEBI registered in
foreign portfolio investors to overseas investors, who wish to invest in the Indian stock market without
registering themselves with the market regulator. P-Notes provide access to Indian securities to these
investors.
Mutual Funds

Insurance Companies

Pension Funds- A fund established to facilitate and organize the investments of the retirement funds
contributed by the employees and employers or even only the employees in some cases.

Venture Capital Funds- A pooled investment vehicle like mutual fund but with mandate to invest money in
enterprises that are in early stage of development but with the potential of long-term growth.

Private Equity Firms- Private equity is a term used to define funding available to companies in the early
stages of growth, expansion or buy-outs. Investee companies may be privately held or publicly traded
companies. The term private equity includes venture capital funds. The money in the fund is contributed
by investors, called limited partners, and invested and managed by the general partner(s).

Hedge Funds- A hedge fund is an investment vehicle that pools capital from a number of investors and
invests that across the assets, across the products and across the geographies. These fund managers
generally have a very wide mandate to generate return on the invested capital.

Alternative Investment funds- These are privately pooled investment schemes that invest in various assets
classes such as real estate, private companies, commodities and such other alternative investment assets.

SEBI categorizes AIFs into three categories:

o Category I AIF: AIFs which invests in start-up or early-stage ventures or social ventures or SMEs or
infrastructure or other sectors or areas which the government or regulators consider as socially or
economically desirable.
o Category III AIF: These refer to those that use complex investment strategies including use of
leverages and derivatives. Hedge funds, Pipe Funds, etc. are registered as Category III AIFs.
o Category II AIF: AIFs which do not fall in the Category I and III and which do not undertake
leverage or borrowing are categorized under Category II AIFs.

Investment Advisers- Investment advisers work with investors to help them decide on assets allocation
and make choice of investment based on an assessment of their needs, time horizon return expectation
and ability to bear risk.

Employee Provident Fund (EPF)

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Every employer is obligated to provide 12% of basic salary as contribution to the scheme and equal
amount is deducted from the employee’s salary. The funds are deposited with Employees’ Provident Fund
organization (EPFO) which administers and manages the funds.

National Pension Scheme (NPS)

Government sponsored retirement scheme. Subscribers contribute regularly to the scheme and on
maturity, the funds accumulated in the scheme can be used to buy annuity products. Subscribers will also
have the option to partially withdraw the funds on maturity.

Family Offices
Family offices refers to an organization that handles the wealth of a wealthy family. They typically take
care of all aspects of financial management of the family including investments, estate planning, and tax
planning.

Corporate Treasuries
Companies and other business organizations may have surplus funds which they intend to use for
potential future opportunities or to meet future obligations. Large corporates have a separate treasury
team that handles such investments of surplus funds.

 Retail Participants
Retail participants include individual investors who buy and sell securities for their personal account, and
not for another company or organization. HNIs or High Net-worth Individuals and UHNIs (Ultra High net-
worth individuals) are individual investors who invest large sum of money in the market. Reserve bank of
India has also granted general permission to Non-Resident Indians (NRIs), Person of Indian origin (PIOs)
and Foreign Investors(QFIs)

 Proxy advisory services firms

Proxy advisors advise investors in relation to exercise of their rights in the company including
recommendation on public offer or voting recommendation on agenda items. Proxy advisors analyze
voting proposals and how it affects the interest of the investors and eventually suggest how they should
vote. Proxy advisors are typically engaged by institutional investors to advise them on matters that come
for voting.

 Kinds of transactions

 Cash, Tom and Spot Trades/Transactions

Cash Trades are the trades where settlement (payment and delivery) occurs on the same trading day (T+0,
where 0 defines the time gap in days between trade day and settlement day). Cash Trades in Financial
Markets are unusual as most contracts are settled between two to three days from the date of trade.

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Tom Trades are the trades where settlement (payment and delivery) occurs on the day next to the trading
day (T+1, where 1 defines the time gap in days between trade and settlement day). Some of the
transactions in Foreign Exchange Market (FX market) settle on T+1 basis.

Spot Trades are the trades where settlement (Payment and Delivery) occurs on the spot date, which is
normally two business days after the trade date. Equity markets in India offer Spot trades.

 Forward transactions
Forward contracts are contractual agreement between two parties to buy or sell an underlying asset at a
certain future date for a particular price that is decided on the date of contract. Both the contracting
parties are committed and are obliged to honor the transaction irrespective of price of the underlying
asset at the time of settlement. This is an OTC executed forward contract.

 Futures
Futures are standardized exchange traded forward contracts. They are standardized as to the market lots
(traded qualities), quality and terms of delivery-delivery date, cash settlement or physical delivery etc. As
these contracts are traded and settled on a stock exchange and the clearing corporation provides
settlement guarantee. Future contracts are available on variety of assets including equities and equity
indices, commodities, currencies and interest rates.

 Options
An Option is a contract that gives the right, but not an obligation, to buy or sell the underlying assets or on
before a stated date and a stated price. The buyer or holder of the option pays the premium and buys the
right, the writer or seller of the option receives the premium with the obligation to sell or buy the
underlying assets, if the buyer exercises his right.
Based on the type of contract, options can be divided into two types:
1. Call gives the buyer the right, but not the obligation, to buy a given quantity of the underlying
assets, at a given price on or before a given future date.
2. Put gives the buyer the right, but not the obligation, to sell a given quantity of the underlying
assets at a given price on or before a given date.
Options can be transacted both in OTC Market and Traded Markets.

 Swaps
A swap in the Financial Markets is a derivative contract made between two parties to exchange cash flows
in the future according to a pre- arranged formula. Swaps help market participants manage risk associated
with volatile interest rates, currency rates and commodity prices.

Trading- Trading or speculating is an act of purchase or sale of an asset in the expectation of a gain from
charges in the price of that asset over a short period of time. Traders or Speculators typically leverage
their trading activity with borrowed funds, while magnifies their gains as well as losses.

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Hedging- Hedging is an act of taking position in the financial transaction to offset potential losses that
may be incurred by another position. Hedged position limits loss as well as gains, since appreciation in
one position is squared-off by depreciation in the other position and vice versa.

Arbitrage- Arbitrage is simultaneous purchase and sale of an asset in an attempt to profit from
discrepancies in their prices in two different markets. The existence of an arbitrage opportunity will
increase selling in the higher- priced market leading to fall in prices ultimately resulting in closing the gap.

Pledging of shares- Pledge is an act of taking loan against securities by the investor. The investor is called
as ‘pledger’ and the entity who is giving the loan against the securities is called as ‘pledgee’.

 Dematerialization and Rematerialization of securities

Dematerialization- dematerialization is a process of converting securities held in physical form into

holdings in book entry (electronic) form. In Demat form, one investor’s shares are not distinguished from
another investor’s shares and these shares do not have any distinctive number, folio number or certificate
number.

Rematerialization- Rematerialization is reverse of dematerialization and is the process of converting

securities held in electronic form into physical form. On request of investors, securities on
rematerialization are allotted in physical form with distinctive number, in a place of securities held
electronically in book-entry form with a depository.

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