Major Instruments Traded in Stock Markets

1. Equity Shares

A. Meaning & Characteristics

• Definition: Equity shares, also known as common stock, represent ownership in a company. When an investor purchases equity shares, they become a part-owner of the company.
• Shareholders: Holders of equity shares are referred to as shareholders and have certain rights and responsibilities, including:
  • Voting Rights: Shareholders typically have the right to vote on important company decisions, such as the election of directors and major corporate actions.
  • Dividends: Shareholders may receive dividends, which are a portion of the company's profits distributed to shareholders. However, dividend payments are not guaranteed and depend on the company's profitability and management's discretion.
  • Capital Appreciation: Shareholders can benefit from capital appreciation if the company's stock price increases over time.
• Risk and Return: Equity shares are generally considered high-risk, high-return instruments, offering the potential for significant capital gains but also exposing investors to the risk of loss.

B. Types of Equity Shares

1. Ordinary (Common) Shares:
   • Carry full voting rights, allowing shareholders to participate in key decisions affecting the company.
   • Entitle shareholders to dividends, when declared by the company.
2. Preference Shares:
   • Entitle shareholders to priority in the payment of dividends and the distribution of assets in the event of liquidation.
   • Typically do not carry voting rights, limiting the shareholder's influence on company decisions.
3. Bonus Shares:
   • Issued to existing shareholders free of charge, as a distribution of the company's accumulated profits or reserves.
   • Increase the number of outstanding shares but do not involve any cash outflow from the shareholders.
4. Rights Shares:
   • Offered to existing shareholders, giving them the right to purchase additional shares at a discounted price, in proportion to their current holdings.
   • Allow shareholders to maintain their ownership stake in the company while raising additional capital.

C. Trading of Equity Shares

• Listing: Equity shares are listed on stock exchanges, such as the BSE (Bombay Stock Exchange) and NSE (National Stock Exchange) in India, allowing investors to trade them freely in the secondary market.
• IPOs and Secondary Markets: Investors can acquire equity shares through Initial Public Offerings (IPOs), where a company offers its shares to the public for the first time, or in the secondary market, where existing shares are traded between investors.
• Price Fluctuations: The prices of equity shares fluctuate based on a variety of factors, including demand and supply, company performance, industry trends, and overall economic conditions.

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2. Debentures

A. Meaning & Characteristics

• Definition: Debentures are long-term debt instruments issued by companies to borrow funds from investors.
• Creditors: Debenture holders are creditors of the company, not owners, and therefore do not have voting rights.
• Fixed Interest: They receive fixed interest payments (coupon payments) at regular intervals, making debentures a relatively predictable income stream.
• Low-Risk Investment: Debentures are generally considered a low-risk investment compared to equity shares, as they offer a fixed rate of return and have a higher claim on the company's assets in the event of liquidation.

B. Types of Debentures

1. Convertible Debentures:
   • Can be converted into equity shares of the company after a specified period, giving the holder the potential to participate in the company's future growth.
2. Non-Convertible Debentures (NCDs):
   • Cannot be converted into equity shares and remain fixed-income securities until maturity.
3. Secured Debentures:
   • Backed by specific assets of the company as collateral, providing added security to the debenture holders.
4. Unsecured Debentures:
   • Not backed by any specific assets and rely on the creditworthiness of the issuing company, typically offering higher interest rates to compensate for the increased risk.

C. Trading of Debentures

• Debt Segment: Debentures are traded in the debt segment of stock exchanges, providing liquidity for investors.
• Government Regulations: Government regulations and credit ratings play a significant role in determining the pricing and demand for debentures.
• Credit Ratings: Credit rating agencies assess the creditworthiness of companies and assign ratings to their debt instruments, helping investors evaluate the risk associated with investing in debentures.

3. Exchange-Traded Funds (ETFs)

A. Meaning & Characteristics

• Definition: Exchange-Traded Funds (ETFs) are investment funds that trade like stocks on stock exchanges. They represent a basket of securities, such as stocks, bonds, or commodities, and are designed to track the performance of a specific index, sector, or asset class.
• Diversification: Offer investors low-cost diversification, allowing them to gain exposure to a broad range of securities with a single investment.
• Liquidity: Investors can buy and sell ETFs throughout the trading day, providing greater flexibility compared to traditional mutual funds.

B. Types of ETFs

1. Index ETFs:
   • Track a specific market index, such as the SENSEX or NIFTY 50, providing investors with a convenient way to replicate the performance of the overall market.
2. Sectoral ETFs:
   • Invest in companies within a specific industry sector, such as banking ETFs, IT ETFs, or pharmaceutical ETFs, allowing investors to target specific areas of the economy.
3. Gold ETFs:
   • Invest in physical gold and provide an alternative to investing in gold bars or coins, offering liquidity and ease of trading.
4. Bond ETFs:
   • Invest in government or corporate bonds, offering stable returns and diversification within the fixed-income market.

C. Trading of ETFs

• Listing: ETFs are listed on stock exchanges like the NSE and BSE, allowing investors to trade them just like individual stocks.
• Trading Process: Investors can buy and sell ETFs through brokerage accounts, with prices fluctuating based on supply and demand in the market.

4. Comparison of Equity Shares, Debentures, and ETFs

Feature	Equity Shares	Debentures	ETFs
Nature	Ownership	Debt	Pooled Investment
Risk Level	High	Low to Moderate	Moderate
Return	Dividends & Capital Gains	Fixed Interest	Market-Linked
Voting Rights	Yes	No	No
Liquidity	High	Moderate	High
Price Volatility	High	Low to Moderate	Moderate
Income Source	Dividends & Price Appreciation	Interest Payments	Market Performance

Conclusion

Equity shares, debentures, and ETFs each serve different investment needs and offer unique risk-return profiles. Equity shares offer the potential for high returns but come with higher risks, while debentures provide stable fixed-income returns with lower risk. ETFs combine diversification with liquidity, making them attractive for passive investors seeking broad market exposure. Understanding the characteristics of each instrument is crucial for investors to make informed decisions and build well-balanced portfolios.