By:- Harshit Anjaria

PGDM (2010-12) –A

Roll No - 07
Stock Market: It is a public market for the trading of stocks and derivatives at an agreed
price. It is also known as Equity Market. It provides trading facilities to for brokers/traders to
trade stocks and securities (definitions of which has been explained later). The stock market
is one of the most important sources for companies to raise money. It allows business to be
publicly traded or raise additional capital for expansion by selling shares of ownership of the
company in a public market.

Types of Market:

1.) Primary Market: It deals with the issue of new securities, capital formatio , IPOs
etc for enterprises. For example, if say Company X wants to start trade its shares,
they will first create the IPO in Primary market. Once the shares are allocated to
the shareholders, subsequent trading will happen in Secondary market (explained
below)

2.) Secondary Market: This is a market where securities are traded after being
initially offered to the public in primary market. As mentioned above, subsequent
trading of the securities/shares will happen in secondary market. Following
instruments are traded in secondary market:

a. Equity Shares

b. Rights Issues

c. Bonus Shares

d. Preferred Stock

e. Government Securities

f. Debentures

g. Bonds

Shares: It is a basic unit used in finance and investing to determine how much of a security is
owned. Basically when a company is in need of raising capital or want to take the venture to
public, it will float shares (or equities). It represents ownership of the company. A person
who owns shares is known as shareholder.

Securities: It is a negotiable instrument representing financial value. These are broadly

categorized into debt securities (includes bonds, debentures) and equity securities (includes
forwards, futures, options, swaps). These are generally traded in Stock Market (NSE/BSE)
and commodities Market (MCEX/NCEX etc).

Equity: A stock or any other security representing an ownership interest. In financial

markets, we refer stocks as equity stocks or simply stocks.
Derivatives: These are contracts to buy or sell the underlying asset at a future time, with the
price, quantity and other specifications defined today. As a matter of fact, the underlying
asset has to be traded or some kind of cash settlement has to transpire. The contract details
may bind both parties or just one party with the other reserving the option to exercise it or
not. Examples of derivatives include futures, options, forwards etc. The advantage of
Derivatives is it is used to hedge risk. One can purchase currency derivatives to lock in for a
specific exchange rate for the future sale and minimize the risk.

Futures: It is a standardized contract between two parties to buy or sell a specified asset of a
standardized quantity at a specified future date at a price agreed today. They are traded on
futures exchange. Basically it means if you sign the futures contract, you are agreeing to buy
something which is yet not produced. The buyers and sellers enter into such markets to hedge
risk rather than to sell goods. For example, assume that you have subscribe to a cable TV
network. You sign an agreement saying that you will pay amount X for this year. Now even
if the cable prices are increased, you will not be paying the increased amount but you will be
paying amount X. By entering into futures contract, you minimize the risk towards higher
prices.

Options: An option is a contract that gives the buyer the right, but not the obligation, to buy
or sell an underlying asset at a specific price on or before a certain date. An option, just like a
stock or bond, is a security. It is also a binding contract with strictly defined terms and
properties. Assume that you have agreed with a builder to buy the house for 40 Lacs. But you
don’t have the cash so you pay him 10K as a security deposit. Now assume that there is one
national highway which is going to be built in your area. Naturally the real estate prices will
shoot up but as you have signed an Options contract, you will pay the undersigned amount of
40K. On the contrary, you got a news that the area is haunted. The result would be the price
of that land will come down but even in this case you are bound to pay 40Lac. Now if you
back off from this agreement, you will only lose 10k amount. This means that you have the
option of exercising the right but you are not under any obligation to buy the option.

Bond:. These are debt instruments. Typically when company is in need of money, they will
try to borrow either from banks or from public. Now in case if they go to public, investors
then will lend part of their capital. As an analogy, it is like a loan. The organization that sells
a bond is known as issuer. The issuer of the bond must pay the investor something extra for
using his money. This ‘extra’ comes in form of interest payment which are predetermined.
The interest rate is referred as coupon. The date at which issue has to repay the amount
borrowed (which actually is known as face value), is called maturity dat. Bonds are generally
fixed income securities because you know how much amount you are going to get on
maturity date.

One more thing to note is bonds are debt but stocks are equity. So by purchasing stocks you
become an owner of the organization but in case of bonds it is not the case. The catch is if
company goes bankrupt, those who have bonds (as they are creditors) will get paid before the
shareholder. Of course, if the company is doing well, shareholders will get a dividend but
bondholders will only get the fixed amount.
Coupon: It is the interest rate that a bond issuer will pay to bondholder. It has nothing to do
with bond price and it is the annual amount of the interest payment.

Aforementioned terms are majorly used in the stock market. But knowing the terms and the
actual business is an altogether different thing. Remember before you invest anything, do a
thorough research about that financial service/product. It helps immensely in long term.