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Explanations about equity shares and Major equity indices

Many financial instruments issued in the market, each with different risk and return features that define its appropriateness for an investor. Let us look into the major instruments available in the Indian securities market:

1. Explanations about equity shares

Who issues the equity shares?

It is issued by the companies

Who can invest?

Institutions and Individuals (Retail and HNI)

What is the medium of issue?

Direct issuance by companies and Stock Exchange

Which is the regulatory body?

SEBI, Regulators under the Companies Act Equity shares represent the form of partial ownership in a business venture. Equity shareholders jointly own the company. They carry the risk so then they enjoy the rewards of ownership.

2. Debentures/Bonds/Notes

Who issues the equity shares?

It is issued by Companies, Government, Special Purpose Vehicles (SPVs)

Who can invest?

Institutions and Individuals can invest

What is the medium of issue?

Direct issuance by issuers and Stock Exchange

Which is the regulatory body?

RBI, SEBI, Regulators under the Companies Act Debentures/Bonds/Notes are instruments that serve for raising long term debt. Debentures were either secured (backed by collateral support) or unsecured in nature. There are a range of debentures/bonds such as fully convertible, non-convertible and partly convertible debentures.

Completely convertible debentures were completely convertible into ordinary shares of the issuing company.

The terms of conversion are precise at the time of issue itself.

PCDs - Partly convertible debentures are slightly convertible into ordinary shares of the issuing company under described terms and conditions as described at the time of issue itself.

The non-convertible segment of these debentures is justified as happens in any other vanilla debenture.

NCDs - Non-Convertible Debentures are pure debt instruments lacking a feature of conversion. The NCDs are repayable/redeemable on maturity. Consequently, debentures can be pure debt or quasi- equity, depending on the case

Short-term debt instruments are used to raise debt for periods not exceeding one year.

These instruments compriseof Treasury Bills issued by the government, Commercial Papers issued by the companies and Certificate of Deposit issued by the banks.

3. Warrants and Convertible Warrants

Who issues the Warrants and Convertible Warrants?

It is issued by Companies

Who are the investors?

Institutions and Individuals can invest

What is the medium of issue?

Direct issuance by companies and Stock Exchange

Which is the regulatory body?

It is regulated by SEBI Warrants are options that entitle an investor to buy equity shares of the issuer company after a specific time period at a given price. Very few companies in Indian Securities Market have issued warrants till now.

4. Indices

A market indexfollows the market movement by using the prices of a small number of shares selected as a representative sample.

Generally leading indices are weighted by market capitalisation to take into account the fact that more the number of shares issued, greater the number of portfolios in which they may be held.

Stocks included in an index are also quite liquid, making it potential for investors to imitate the index at a low cost.

Narrow indices are usually made up of the most actively traded equity shares in that exchange. Other indices to follow sectors or market cap categories are also in use.

The most widely tracked indices in India are the S&P BSE Sensitive Index (S&P BSE Sensex), the MSEI Flagship Index (SX40) and the Nifty 50.

The SX40 is composed of 40 most representative stocks listed on Metropolitan Stock Exchange of India Ltd (MSEIL) and the Nifty 50 is composed of 50 most representative stocks listed on the National Stock Exchange.

The shares included in these indices are selected on the root of aspects such as liquidity, availability of floating stock and size of market capitalization. The composition of stocks in the index is re-examined and customized from time to time to keep the index representative of the underlying market.

A few other common indices in India are mentioned below:

Nifty Next 50

Nifty 100

Nifty 500

S&P BSE-100

S&P BSE- 500

S&P BSE-Midcap

S&P BSE-Small Cap

There are also sector indices for banking, information technology, pharma, fast-moving consumer goods and such other sectors, created by the exchanges to enable tracking definite sectors.

The major uses of indices are listed below:

The index can give a comparison of returns on investments in stock markets as opposed to asset classes such as gold or debt.

For the comparison of performance with an equity fund, a stock market index can be the Benchmark.

The performance of the economy or any sector of the economy is indicated by the index.

Real time market sentiments are indicated by indices.

Indices act as an underlying for Index Funds, Index Futures and Options.

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