CAPITAL MARKET INSTRUMENTS:
A Capital Market is a market for securities like debts or equity,where business enterprises and government raise long term funds.It ia a types of market in which money is provided for a period more than one year and for the arrangement of funds for the short term period is from another market known as money market.
Capital market is characterized by a large variety of financial products like equity and preference shares,Fully convertable debenture(FCD),Non convertable debenture(NCD),Partialy convertable debentures(PCD).However,new instruments are beign introduce such as debenture bundled with warrants,participating preference share,zero cupon bonds ect.
Types of Capital Market Instruments:
1.Secured Premium Notes(SPN):It is a secured debenture redeemed at premium along with ditachable warrants.It is redeemable after notice period say four to seven years.The warrants attached to SPN gives holders the right to apply and get alloted equity shares.
There is an lock in period for SPN during which no interest will be paid for an invested amount.the SPN holders have a right to sell back the SPN to the company at par after lock in period.If holder use the option then no interest or premium is paid to the holder.If the holder hold it further then he have to paid the premium and interest on redeemption on installments as decided by the company.
2.Deep Discount Bonds:It is a types of Bonds that sells at discounted rate from par value and it has no coupon rate or lower coupon rate than prevailing rate of fixed income securities with a similar risk profile.
The main objectives ot this types of bonds is to meet the long term funds requirements of the issuer and investors who are not looking for immidiate returns.They are sold for the long maturity period of 25 to 30 years.
3.Equity Share with ditachable Warrants: A warrant is a security issued by the company entitled holders to buy the given numbers of share at stipulated price during the specified period.these warrants are seperatly registered with stock exchange and traded seperatly.Warrants are frequently attached to bond or preferred stock as sweetener allowing the issuer to pay lower interest rate or dividends.Eg Essar,Reliance ect issued this types of warrants.
4.Fully Convertible Debentures with Interest:These are the debt instruments and converted into equity share after a specified period of time.The conversion may be in one or several phases.If the debt instrument is pure debt then interest is paid to investors.After the conversion interest is ceases on the converted portion.If the project is financed through Fully Convertable Debenture issue then the investors can earn interest even when the project is under implementation.Once the operation of the project is started investors get share price appreciation and dividend payments.
5.Equi Pref:They are fully convertible cumulative preference shares.This instrument is divided into two parts,Part A and Part B.Part A is the automatic conversion into equity shares on date of allotment without any appllication by the allotee.Part B is redeemed at par or converted into equity after lock in period at the option of the investors,at the price lower than 30% average market price.
6.Sweat Equity Shares:Sweet equity are a types of equity share given to the companies employess in recognision of their work.It means to give options to the employees to buy the share of the company.So they became a part of owner and participate in profit apart from salary earning.This helps to boost the sentiments of the employees to wark hard and to achieve the goals of the company.
7.Tracking Stocks:These are a securities issued by the parents company to track the result of the one of the subsidiaries without having claim on the assets of the parent company.When parent company issued the tracking stocks then its all revenues and expenses are separeted from the parent company's financial statements.Sometimes the high growth subsidiaries financial statement is seperated from the lose making parent company's statements.
8.Disaster Bonds:It is a high yield debt instrument and is usually linked to insurance and is used to raised money in case of catastrophe.If the issuer suffer al loses then the issued has to pay the interest or principle amount to the investors.
9.Mortgage Back Securities(MBS):It is basically a types of assets back security.It is a debt obligation the represent a cash flow from mortgage loan mostly from the residential property.It derived and claim their ultimate values from payment of principle and loans in the pool.The payment is broken down into different class of securities depending on the riskeness of the mortgaged.
Kind of Mortgage back securities:
9.1 Commercial Mortgage Back Security:These are the commercial property which is beign kept as a mortgaged.
9.2 Collateralized Mortgage Obligation:It is a complex MBS in which morgages are ordered into tranches by some quality,with each tranche is sold as a seperate security.
9.3 Stripped Morgage Backed Security:Each mortgage payment is partly used to pay down the loan principal and partly pay the interest on it.
10.Global Depository Receipts or American Depository Receipts:These are the negotialble certificate held in the bank of the one country which representing the specified number of share traded on the stock exchange of another country.Mainly GDR facilitate trading in the shares of developing countries companies.The GDR price are closely related to the price of related shares.
ADR are the negotiable certificate traded in US stock market which carry share of US companies.
11.Foreign Currency Convertible Bonds(FCCB):It is a mix between the equity and debt instrument.It is a bond having regular coupon and principal payment.This bond also give option to bondholders to convert the bond into stock.FCCB is issued in the currency different than the issuer's domestic currency.
Advantages of FCCB:
a) Many companies like Banks,Finance institutions ect decided to issue bonds in foreign currencies because they predict that their domestic currency may be stable in near future.
b) It gives issuers a opportunity to access foreign market for raising capital for investment.
c) These bonds act like a debt and equity instruments.These bonds also helps bondholders to convert the bonds into stocks,apart of getting regular coupan and principal payments.
d) It is a low cost bonds because it consist of lower interest rate normally 30 -50% lower than market rate due to the equity component consist in it.
e) It have an advantages of large price appreciation in the company stock's.
f) It is redeemable at maturity if not converted.
Disadvantages:
a)There is higher foreign exchange risk in FCCB as the borrowing is in foreign currency so the interest is also paid in foreign currency.The firms which have low debt equity ratio and have earning potential is in foreign currency are opted FCCB's.
b) FCCB create more debt in foreign currency,so the interest is also more in the form of foreign currency.
c) In FCCB interest rate is low but there is more exchange risk in both interest and principal.
d) If there is decline of stock price,investors will not go for conversion rather go for redemption.So the companies are going for refinancing for fulfilling promise of redemption which can hit earning.
12.Derivatives:It is a financial instrument,which have a characteristic in which value have been derived from any underlying assets like Commodity,Bonds,Equity,Currency ect.These are sometime leverage in which small movement in underlaying value can cause a large difference in value of derivative.Derivatives are largely use to protect the risk of fluctuation in the value of currency,shares ect by using hedging techniques.
12.1 Futures:It is a types of financial contract obligation in which buyer is purchasing the assets such as physical commodity or financial instrument at predetermined future date and price.Future contract have detailed on quality and quantity of underlying assets.Some future contract have facility in delivery in physical quantity while other are settled in cash.This market have characterized by the ability to use very high leverage relative to the stock market.
12.2 Options:It is a types of financial derivatives which represents a contracts sold by one party called option writer to another party called option holder.These types of contracts offer buyers the right but not the obligation to buy(call) or put(sell) a security ot other financial assets at agreed upon priced during thr certain period of time or an specific date.
A call option give the buyer the right to buy the assets at the given price which is called strike price.The holder of the call optiion has the right to demand the sale of the assets from the seller,who have only obligation and not the right.Similarly,put option gives the buyer a right to sell the assets at the strike price to the buyer.Here a buyer have a right to sell and the seller has the obligation to buy.
13.Participatory Notes:These are known as P- Notes which are Financial Instruments used by investors or hedge funds that are not registered with Security and Exchange Board of india invest in indian securities.Indian based brokerages buy indian based securities through P-Notes on the behalf of the foreign investors.If any divindend collected from the underlying securities are going back to the investors.
14.Hedge Fund:This is types of fund available to the very small numbers of investors that undertake a wide range investments and trading activities in both domestic and international markets,investors pay parformance fees to the investment manager.Every hedge fund has its own investment stratergies that determine the types of investment and method of investment it undertakes.This types of funds invest in board range of investments including share,debt and commodities.
15.Fund of Funds:It is types of investment stratergies hold portfolios of other investment funds rather than invest directly in share,bonds or other securities.Thsi types of investment is often refered to a multi manager investment.A fund of fund allow investors to achieve a board diversification and appropriate assets allocations with investment in a variety of fund catergories that are all wrapped up into one fund.
16.Exchange Traded Fund(ETF):It is an investment vhical traded on stock exchange like stocks.ETF hold the stocks traded on stock exchange and move same as the exchange move.Most ETF track the index such as S&P 500.ETF may be attractive as investment because of their low cost,Tax efficiency and stock like feature and single security can track the the performance of the growing number of different index fund.
17.Gold ETF:It is a financial instrument like mutual fund whose value depend on the price of gold.In most cases one unit of gold ETF is approximately equal to one gram of gold.As the price of gold rise then the price of ETF is also expected to rise by the same amount.Gold exchange traded fund are traded on the major stock exchange like mumbai,zurich,londan ect.
Kind of Mortgage back securities:
9.1 Commercial Mortgage Back Security:These are the commercial property which is beign kept as a mortgaged.
9.2 Collateralized Mortgage Obligation:It is a complex MBS in which morgages are ordered into tranches by some quality,with each tranche is sold as a seperate security.
9.3 Stripped Morgage Backed Security:Each mortgage payment is partly used to pay down the loan principal and partly pay the interest on it.
10.Global Depository Receipts or American Depository Receipts:These are the negotialble certificate held in the bank of the one country which representing the specified number of share traded on the stock exchange of another country.Mainly GDR facilitate trading in the shares of developing countries companies.The GDR price are closely related to the price of related shares.
ADR are the negotiable certificate traded in US stock market which carry share of US companies.
11.Foreign Currency Convertible Bonds(FCCB):It is a mix between the equity and debt instrument.It is a bond having regular coupon and principal payment.This bond also give option to bondholders to convert the bond into stock.FCCB is issued in the currency different than the issuer's domestic currency.
Advantages of FCCB:
a) Many companies like Banks,Finance institutions ect decided to issue bonds in foreign currencies because they predict that their domestic currency may be stable in near future.
b) It gives issuers a opportunity to access foreign market for raising capital for investment.
c) These bonds act like a debt and equity instruments.These bonds also helps bondholders to convert the bonds into stocks,apart of getting regular coupan and principal payments.
d) It is a low cost bonds because it consist of lower interest rate normally 30 -50% lower than market rate due to the equity component consist in it.
e) It have an advantages of large price appreciation in the company stock's.
f) It is redeemable at maturity if not converted.
Disadvantages:
a)There is higher foreign exchange risk in FCCB as the borrowing is in foreign currency so the interest is also paid in foreign currency.The firms which have low debt equity ratio and have earning potential is in foreign currency are opted FCCB's.
b) FCCB create more debt in foreign currency,so the interest is also more in the form of foreign currency.
c) In FCCB interest rate is low but there is more exchange risk in both interest and principal.
d) If there is decline of stock price,investors will not go for conversion rather go for redemption.So the companies are going for refinancing for fulfilling promise of redemption which can hit earning.
12.Derivatives:It is a financial instrument,which have a characteristic in which value have been derived from any underlying assets like Commodity,Bonds,Equity,Currency ect.These are sometime leverage in which small movement in underlaying value can cause a large difference in value of derivative.Derivatives are largely use to protect the risk of fluctuation in the value of currency,shares ect by using hedging techniques.
12.1 Futures:It is a types of financial contract obligation in which buyer is purchasing the assets such as physical commodity or financial instrument at predetermined future date and price.Future contract have detailed on quality and quantity of underlying assets.Some future contract have facility in delivery in physical quantity while other are settled in cash.This market have characterized by the ability to use very high leverage relative to the stock market.
12.2 Options:It is a types of financial derivatives which represents a contracts sold by one party called option writer to another party called option holder.These types of contracts offer buyers the right but not the obligation to buy(call) or put(sell) a security ot other financial assets at agreed upon priced during thr certain period of time or an specific date.
A call option give the buyer the right to buy the assets at the given price which is called strike price.The holder of the call optiion has the right to demand the sale of the assets from the seller,who have only obligation and not the right.Similarly,put option gives the buyer a right to sell the assets at the strike price to the buyer.Here a buyer have a right to sell and the seller has the obligation to buy.
13.Participatory Notes:These are known as P- Notes which are Financial Instruments used by investors or hedge funds that are not registered with Security and Exchange Board of india invest in indian securities.Indian based brokerages buy indian based securities through P-Notes on the behalf of the foreign investors.If any divindend collected from the underlying securities are going back to the investors.
14.Hedge Fund:This is types of fund available to the very small numbers of investors that undertake a wide range investments and trading activities in both domestic and international markets,investors pay parformance fees to the investment manager.Every hedge fund has its own investment stratergies that determine the types of investment and method of investment it undertakes.This types of funds invest in board range of investments including share,debt and commodities.
15.Fund of Funds:It is types of investment stratergies hold portfolios of other investment funds rather than invest directly in share,bonds or other securities.Thsi types of investment is often refered to a multi manager investment.A fund of fund allow investors to achieve a board diversification and appropriate assets allocations with investment in a variety of fund catergories that are all wrapped up into one fund.
16.Exchange Traded Fund(ETF):It is an investment vhical traded on stock exchange like stocks.ETF hold the stocks traded on stock exchange and move same as the exchange move.Most ETF track the index such as S&P 500.ETF may be attractive as investment because of their low cost,Tax efficiency and stock like feature and single security can track the the performance of the growing number of different index fund.
17.Gold ETF:It is a financial instrument like mutual fund whose value depend on the price of gold.In most cases one unit of gold ETF is approximately equal to one gram of gold.As the price of gold rise then the price of ETF is also expected to rise by the same amount.Gold exchange traded fund are traded on the major stock exchange like mumbai,zurich,londan ect.
