Securities Markets and Instruments
This domain tests how Indian securities markets are segmented and how instrument terms drive risk, return and regulation. Expect questions that ask you to classify an instrument, identify the holder's legal claim, or select the market where it is issued or traded.
Market segments
- Primary market: new issuance; proceeds go to the issuer. Secondary market: trading between investors; proceeds go to the seller.
- Money market: instruments up to one year - Treasury bills, commercial paper, certificates of deposit, call money. Capital market: equity and long-term debt.
- Exchange-traded (transparent, cleared) versus over-the-counter (bilateral, counterparty risk).
Instrument features
- Equity shares: residual claim, voting rights, dividend at board discretion.
- Preference shares: fixed dividend rate, priority over equity, usually cumulative, limited voting.
- Debentures and bonds: contractual coupon and maturity, creditor claim, may be secured or unsecured.
- Derivatives: futures and options, leveraged, margined, expiring.
- Hybrids and pooled vehicles: convertible debentures, warrants, ETFs, REITs and InvITs.
Worked example
An investor has ₹10 lakh. A 10% debenture pays ₹1,00,000 a year and returns ₹10 lakh at maturity, ahead of equity. Ten thousand equity shares at ₹100 with a ₹2 dividend pay only ₹20,000, but the equity holder shares in growth and votes. The debenture holder is a creditor; the shareholder is an owner. The higher contractual income reflects lower upside, not necessarily higher safety in every case.
Traps that cost marks
- Treating preference dividend as legally guaranteed: it is payable when declared, though arrears accumulate if cumulative.
- Confusing face value with market price when computing dividend or coupon.
- Assuming an ETF always trades at NAV; market price can deviate.
- Calling a debenture holder an owner.