Have you ever wondered what happens to stocks after a company goes public with a flashy IPO (Initial Public Offering)? The exciting world of secondary markets is where the real action takes place! This blog post dives into the various investment instruments you can find in India’s secondary markets.
Think of it Like a Giant Marketplace:
Imagine a bustling marketplace filled with stalls selling all sorts of things. The IPO is like a grand opening for a new shop. But the secondary market is the entire marketplace where people can continue buying and selling those same items (or in this case, company shares) long after the opening day.
A Treasure Trove of Investment Options:
India’s secondary markets offer a diverse range of investment instruments for every investor’s taste:
- Equity Shares: These are the most common type of investment, representing ownership pieces of companies. Think of them as tiny slices of that delicious pizza company you love! By buying shares, you become a mini-owner and potentially benefit from the company’s growth.
- Debt Instruments: These are essentially IOUs (I Owe You) issued by companies or the government. When you buy a debt instrument, you’re loaning money and expect to be repaid with interest. Think of it like lending your friend some cash; they promise to pay you back with a little extra on top! Examples include bonds and debentures.
- Derivatives: These are contracts derived from the value of other assets like stocks, currencies, or commodities. They can be used for various purposes like hedging risk (protecting yourself from losses) or speculating on price movements (trying to make a quick profit). Derivatives can be complex, so it’s important to understand them well before investing.
- Mutual Funds: These are a type of pooled investment where your money is combined with other investors’ money and managed by a professional. The fund manager then buys a variety of assets, offering investors diversification and potentially lower risk. Think of it like putting your money in a basket with others, spreading the risk across different investments.
- Exchange Traded Funds (ETFs): These are similar to mutual funds but trade on stock exchanges like individual stocks. ETFs typically track a particular index (a basket of assets) and offer a convenient way to invest in a specific market segment. Imagine an ETF that tracks the performance of all the top IT companies in India!
Benefits of Secondary Markets:
- Liquidity: Secondary markets allow investors to easily buy and sell their investments, providing greater flexibility. It’s like having a marketplace where you can readily find buyers and sellers for your investment.
- Price Discovery: Through continuous buying and selling, secondary markets establish fair market prices for various investment instruments. Think of it like a giant auction where supply and demand determine the value of each investment.
- Investment Diversification: Secondary markets offer a wide variety of instruments, allowing investors to spread their risk across different asset classes and investment styles. It’s like having a toolbox filled with different tools for different financial needs.
Exploring Your Options:
Before diving into the secondary market, it’s crucial to do your research and understand the risks involved. Consider consulting a financial advisor who can help you choose the right investment instruments based on your financial goals and risk tolerance.
With a little knowledge and the right tools, the secondary market can be a valuable avenue for growing your wealth in India!
What are the products dealt in the Secondary Markets?
Following are the main financial products/instruments dealt in the Secondary market, which may be divided broadly into Shares and Bonds:
Shares:
Equity Shares: An equity share, commonly referred to as ordinary share, represents the form of fractional ownership in a business venture.
Rights Issue/ Rights Shares: The issue of new securities to existing shareholders at a ratio to those already held, at a price. For e.g. a 2:3 rights issue at Rs. 125, would entitle a shareholder to receive 2 shares for every 3 shares held at a price of Rs. 125 per share.
Bonus Shares: Shares issued by the companies to their shareholders free of cost based on the number of shares the shareholder owns.
Preference shares: Owners of these kind of shares are entitled to a fixed dividend or dividend calculated at a fixed rate to be paid regularly before dividend can be paid in respect of equity share. They also enjoy priority over the equity shareholders in payment of surplus. But in the event of liquidation, their claims rank below the claims of the company’s creditors, bondholders/debenture holders.
Cumulative Preference Shares: A type of preference shares on which dividend accumulates if remained unpaid. All arrears of preference dividend have to be paid out before paying dividend on equity shares.
Cumulative Convertible Preference Shares: A type of preference shares where the dividend payable on the same accumulates, if not paid. After a specified date, these shares will be converted into equity capital of the company.
Bond: is a negotiable certificate evidencing indebtedness. It is normally unsecured. A debt security is generally issued by a company, municipality or government agency. A bond investor lends money to the issuer and in exchange, the issuer promises to repay the loan amount on a specified maturity date. The issuer usually pays the bond holder periodic interest payments over the life of the loan. The various types of Bonds are as follows:
Zero Coupon Bond: Bond issued at a discount and repaid at a face value. No periodic interest is paid. The difference between the issue price and redemption price represents the return to the holder. The buyer of these bonds receives only one payment, at the maturity of the bond.
Convertible Bond: A bond giving the investor the option to convert the bond into equity at a fixed conversion price. Treasury Bills: Short-term (up to one year) bearer discount security issued by government as a means of financing their cash requirements.