Define Negotiable Securities

Negotiable Securities

Variable Income Securities

Equity Shares

The equity shares attract the interest of many. In the early nineties, the stock market was the best and safety place for the common individual to invest. Since 1996 the share market prices have been low. This made the retail investors to turn away from the stock market. The characteristic features of the equity are given in the previous chapter.

The stock market classifies shares into Growth shares, Income shares, Defensive shares, Cyclical shares and Speculative shares.

Growth Shares The stocks that have higher rate of growth than the industrial growth rate in profitability are referred to as growth shares. For example, the list of major gainers for 1996 is dominated by software sector stocks. The HCL and Info systems share prices increased sharply.

Income Shares These stocks belong to companies that have comparatively stable operations and limited growth opportunities. The bank shares and some of the fast moving consumer goods stocks such as Cadburys, Nestle and Hindustan Lever may be termed as income shares.

Defensive Shares Defensive stocks are relatively unaffected by the market movements. For example, a host of pharmaceutical stocks posted returns in excess of 50 per cent in 1998. The pharmaceutical industry owing to its inherent nature of demand is not affected by the down turn in the economy.

Cyclical Shares The business cycle affects the cyclical shares. The upward and downward movements of the business cycle affect the business prospects of certain companies and their stock prices. Such shares provide low to moderate current yield. Capital gain may be highly variable. For example, the automobile sector stocks are affected by the business cycles.

Speculative Shares Shares that have lot of speculative trading in them are reffered to as speculative shares. During the bull and bear phases of the market, this type of shares attracts the attention of the trades.

The stocks, which fall under one category in one period, may switch over to another category in another period. The classification should not be considered rigid. For example, growth shares may be speculative shares.

Fixed Income Securities

I) Preference Shares

A detailed description of the preference shares is given in chapter 1. Preference shares are no longer regarded as inferior to the equity capital. Corporate like Siemens has placed ` 150 Cr. Worth of preference shares. High tax paying companies or investors prefer to subscribe to the preference shares and investors with a low tax burden would prefer to go in for debt instruments. The conversion options provided in the by preference shares also maktttive. Thiggest advantaghemptatuhreference share’s dividend.

II) Debentures

Corporate debentures are an option available to the investors who are sacrifice liquidity for higher return. Manufacturing companies like Gujarat Industries Power and TISCO have issued debentures. If the debentures are not actively traded in the debt segment of the capital market, the investors may have to hold the instrument till maturity. If the instruments were actively traded in the secondary market, it would have perhaps changed hands at a considerable premium, thereby lowering the yield on par with the present interest rate. These reasons contribute towards high coupon rates on debentures.

III) Bonds

Bonds are similar to the debentures but they are issued by the public sector un-dertakings. The value of the bond in the market depends upon the interest rate and the maturity. The coupon rate is the nominal interest rate offered on the bonds. The coupon rate is contractual involving the terms and conditions of the issuance of the debt security. Being contractual it cannot be changed during the tenure of the instrument. The investors are not affected by lowering of the bank rates. When the bank rates are lowered, actually, the value of the bonds, which are carrying interest rates above the bank rate would appreciate. IDBI and ICICI have issued various bonds to suit the needs of the investors. Some of them are deep discount bond, education benefit bond, retirement benefit bond and index bond.

IV) IVPs AND KVPs

These are saving certificates issued by the post office with the name Indira VikasPatra (IVP) and KisanVikasPatra (KVP). The IVPs are in the face value of` 500, 1000 and 5000. The KVPs are in the denomination of` 1000, 5000 and 10000. The capital is doubled in 5.5 years with the return of 13.47%. IVPs are like bearer bounds, transferable by hand delivery and therefore are attractive to the persons who prefer cash transactions. No income tax concession is available for this type of investment.

Government Securities The securities issued by the Central, State Government and Quasi Government agencies are known as Government securities or gilt edged securities. As Government guaranteed security is a claim on the Government, it is a secured financial instrument, which guarantees the income and the capital. The rate of interest on these securities is relatively lower because of their high liquidity and safety.

Money Market Securities Money market securities have very short term maturity say less than a year. Common money market instruments are:

Treasury bills

Commercial paper

Certificate of deposit

Treasury Bills

A treasury bill is basically an instrument of short term borrowing by the Government of India. To develop the Treasury bill market and provide investors with financial instruments of varying short-term maturities and to facilitate the cash management requirements of various segments of the economy, in April 1997 treasury bills of varied maturities were introduced. 14-day Treasury bill on a weekly basis was introduced from June 6, 1997. In the second half of 1997-98, Treasury bill of 28-day was introduced on auction basis. Further, it was decided to reintroduced 182-day treasury bills through auctions. Generally, treasury bills are of 91-days. Since the interest rates offered on the offered on the treasury bills are very low, individuals very rarely invest in them.

Commercial Papers

Commercial paper is a short-term negotiable instrument with fixed maturity period. It is an unsecured promissory note issued by the company either directly or through bank/ merchant banks. The maturity period of commercial paper was originally three (minimum) to six (maximum) months from the date of issue. In Oct 1993, the maximum period was extended to one year. The commercial papers are sold at a discount and redeemed at their face value. The discounted value implicated the interest rate. The denomination of commercial paper is high. Mostly the companies and institutional investors favour them. The minimum maturity of CP was brought down from 3 months to 30 days.

Certificate of Deposit

The certificate of deposit is a marketable receipt of funds deposited in a bank for a fixed period at a specified rate of interest. They are bearer documents and readily negotiable. The denominations of the CD and the interest rate on them are high. It is mainly preferred by institutional investors and companies rather than the individuals. The minimum size of the certificate is ` 10 lakh. The additional amount is issued in multiples of ` 5 lakh.