INTRODUCTION TO SECURITIES

Introduction to Securities

• Definition: Securities are financial instruments that represent a claim on the assets and profits of a company.
• Details: They can be classified into two main categories: equity and debt.

Key Features of Equity and Debt

• Equity:
  • Definition: Equity capital is contributed by owners and outside investors in the form of shares.
  • Features: Limited liability, ownership rights, voting rights, residual profits, liquidity, and perpetuity.
  • Benefits: Potential for long-term growth, dividend income, and capital appreciation.
• Debt:
  • Definition: Debt capital is borrowed by companies from lenders in the form of loans or debt securities.
  • Features: Fixed return, security, regular interest payments, and repayment of capital on maturity.
  • Benefits: Regular income, lower risk, and potential for capital preservation.

Hybrid Instruments

• Definition: Hybrid instruments combine features of both debt and equity.
• Examples: Convertible debentures and preference shares.
• Features: Convertible debentures pay interest and can be converted into equity shares, while preference shares offer a pre-determined dividend and priority over ordinary equity shares.

Key Concepts

• Capital Structure: The mix of debt and equity used by a company to finance its operations.
• Cost of Capital: The price paid by a company for using equity or debt capital.
• Credit Risk: The risk that a debt instrument may default on its interest payments.
• Liquidity: The ability to buy or sell a security quickly and at a fair price.

Important Terms

• Face Value: The nominal value of a debt instrument.
• Coupon Rate: The interest rate paid on a debt instrument.
• Maturity Date: The date on which a debt instrument is repaid.
• Convertible Debentures: Debt instruments that can be converted into equity shares.
• Preference Shares: Shares that offer a pre-determined dividend and priority over ordinary equity shares.