All other basics of share market

March 31, 2008


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.

Why should one invest in equities in particular?

When you buy a share of a company you become a shareholder in that

company. Shares are also known as Equities. Equities have the potential to

increase in value over time. It also provides your portfolio with the growth

necessary to reach your long term investment goals. Research studies have

proved that the equities have outperformed most other forms of

investments in the long term. This may be illustrated with the help of

following examples:

a) Over a 15 year period between 1990 to 2005, Nifty has given an

annualised return of 17%.

b) Mr. Raju invests in Nifty on January 1, 2000 (index value 1592.90).

The Nifty value as of end December 2005 was 2836.55. Holding this

investment over this period Jan 2000 to Dec 2005 he gets a return of

78.07%. Investment in shares of ONGC Ltd for the same period

gave a return of 465.86%, SBI 301.17% and Reliance 281.42%.

Therefore,

§ Equities are considered the most challenging and the rewarding,

when compared to other investment options.

§ Research studies have proved that investments in some shares with

a longer tenure of investment have yielded far superior returns than

any other investment.

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