Introduction to Securities Market – NISM Series XV Short Notes (Part 2)
This is Part 2 of the NISM Research Analyst Short Notes series on PassNISM.in. This post covers the Introduction to Securities Markets chapter — one of the most important and frequently tested topics in the NISM Series XV exam.
From financial instruments and market participants to types of transactions and modes of holding securities, this guide covers everything you need for quick revision.
What is a Securities Market?
A securities market is a marketplace where buyers and sellers come together to trade financial instruments. It plays a critical role in the economy by channelling savings into productive investments.
The securities market has four main constituents:
- Investors — Retail investors, mutual funds, insurance companies, and other entities who invest capital
- Borrowers / Fund Seekers — Banks, companies, and governments that need capital
- Intermediaries — Stock brokers, merchant banks, investment banks, and depositories that facilitate transactions
- Regulatory Bodies — RBI (Reserve Bank of India), SEBI (Securities and Exchange Board of India), and AMFI (Association of Mutual Funds in India)
Financial Instruments in the Securities Market
The NISM Series XV syllabus covers a wide range of financial instruments. Here is a concise explanation of each:
Equity Shares
Equity shares are units of ownership in a company. Public companies issue equity shares to raise long-term capital. Shareholders participate in the profits through dividends and benefit from price appreciation.
Preference Shares
Preference shares receive dividends before equity shareholders. However, they usually do not carry voting rights. They offer more stable income compared to equity shares.
Debentures and Bonds
Debentures and bonds are debt instruments issued by governments and companies. They carry a fixed rate of interest and are essentially loans from investors to the issuer. Companies issue bonds when they need to borrow money without diluting equity ownership.
Foreign Currency Bonds
These are bonds issued by a company in a currency other than its home country's currency. Companies from emerging markets often issue bonds in USD to benefit from lower international interest rates.
External Bonds / Masala Bonds
External bonds (also called Eurobonds) are issued in a currency different from the country where they are issued. Masala bonds are a special type — they are issued outside India but are denominated in Indian Rupees (INR). This means the currency risk is borne by the investor, not the Indian issuer.
Warrants and Convertibles
These are long-term securities that give the holder the right to convert them into another security — typically equity shares — at a future date. They start as debt or hybrid instruments and can turn into equity at maturity.
Foreign Currency Convertible Bonds (FCCB)
A FCCB is a mix of debt and equity. It is issued in foreign currency and pays regular coupon and principal like a bond. However, it also gives the bondholder the option to convert the bond into equity shares of the issuing company. This is attractive when the company's stock price rises.
Mutual Funds
A mutual fund pools money from many investors and invests it in stocks, bonds, or other securities. A professional fund manager manages the portfolio. The objective is to generate returns for all investors collectively.
Stock Market Indices
An index is a statistical measure representing the overall performance of the stock market or a specific segment. For example, Nifty 50 and S&P BSE Sensex are indices that track the top 50 and 30 companies respectively. They reflect market sentiment and direction.
IDRs, GDRs, and ADRs
Depository receipts allow large companies to raise funds in foreign markets. A depository bank holds the underlying shares and issues receipts on a local exchange. ADRs trade in the US, GDRs trade in European markets, and IDRs (Indian Depository Receipts) are issued by foreign companies in India.
Equity Linked Debentures (ELDs) and Commodity Linked Debentures (CLDs)
ELDs are debt instruments whose interest is linked to equity market returns — such as Nifty 50 or Sensex. CLDs are similar but linked to commodity prices. Both are floating-rate instruments.
Mortgage-Backed Securities (MBS)
An MBS is an asset-backed security secured by a pool of mortgage loans. The mortgages are bundled together and sold as tradeable securities to investors. This is a form of securitisation.
REITs and InvITs
Real Estate Investment Trusts (REITs) pool money to invest in income-generating real estate properties. Infrastructure Investment Trusts (InvITs) invest in revenue-generating infrastructure projects like roads, power plants, and pipelines.
Commodities
Commodities are basic goods that are largely interchangeable with others of the same type. They fall into two categories:
- Hard commodities — Natural resources extracted or mined (metals, crude oil)
- Soft commodities — Agricultural products (grains, pulses, cotton)
Precious Metals
Gold, silver, and platinum are viewed as stores of value. Unlike perishable commodities, precious metals have a very long life and are considered a hedge against inflation and currency devaluation.
Commodity ETFs
A Commodity ETF (Exchange Traded Fund) pools money to invest in a range of physical commodities. Gold ETFs are the most common type in India. Investors buy units of the ETF rather than the physical commodity itself.
Futures Contracts
A futures contract is a standardised, regulated agreement to buy or sell an asset at a specific price on a future date. Both the buyer and seller are obligated to complete the transaction. An investor can profit from price movements without physically owning the underlying asset.
Warehouse Receipts
A warehouse receipt is a document proving ownership of goods stored in a warehouse. Most warehouse receipts are negotiable instruments — the ownership of the underlying goods can be transferred simply by transferring the receipt.
Structure of the Market: Primary vs Secondary Market Primary Market
The primary market is where companies and governments issue new securities to raise fresh capital directly from investors. Methods of issuance include:
- Initial Public Offering (IPO)
- Further Public Offering (FPO)
- Private Placement
- Qualified Institutional Placement (QIP)
- Preferential Issue
- Rights Issue
- Bonus Issue
- Onshore and Offshore Offerings
- Offer for Sale (OFS)
- Sweat Equity
- Employee Stock Option Scheme (ESOP)
Secondary Market
After securities are issued in the primary market, they are bought and sold among investors in the secondary market. The secondary market provides liquidity. It is divided into:
- Over-the-Counter (OTC) Markets — Decentralised, negotiated between parties directly
- Exchange-Regulated Markets — Centralised, transparent trading on stock exchanges like NSE and BSE
Participants in Financial Markets 1. Market Intermediaries
These entities facilitate market transactions:
- Stock Exchanges (NSE, BSE)
- Depositories (NSDL, CDSL)
- Depository Participants
- Stock Brokers and Sub-Brokers
- Authorised Persons
- Custodians
- Clearing Corporations
- Merchant Banks
- Underwriters
2. Institutional Participants
Large organisations that invest significant capital:
- Foreign Portfolio Investors (FPIs)
- P-Note Participants
- Mutual Funds
- Insurance Companies
- Pension Funds
- Venture Capital Funds
- Private Equity Firms
- Hedge Funds
- Alternative Investment Funds (Category I, II, and III)
- Investment Advisors
- Employee Provident Fund (EPF)
- National Pension Scheme (NPS)
- Family Offices
- Corporate Treasuries
3. Retail Participants
Individual investors who invest their personal savings in the securities market.
4. Proxy Advisory Services Firms
Firms that advise institutional investors on how to vote on corporate resolutions at shareholder meetings.
Types of Transactions in Securities Markets Cash / Tom / Spot Trades
A spot transaction is settled at the current market price on or near the trade date. The exchange rate at the time of the transaction is the spot exchange rate.
Forward Contracts
A forward contract is an unregulated, OTC-traded customised agreement between two parties to buy or sell an asset at a pre-agreed price on a future date. Forwards are often used for hedging currency or commodity risk. Their non-standardised nature makes them flexible but less liquid.
Futures
Futures are standardised, regulated derivative contracts that obligate both parties to transact at a specific price and date. Unlike forwards, futures are exchange-traded and standardised. Both the buyer and seller must honour the contract.
Options
Options give the buyer the right but not the obligation to buy or sell an asset at a specific price before or on a specific date. Two types:
- Call Option — Right to buy
- Put Option — Right to sell
Swaps
A swap is a derivative in which two counterparties exchange cash flows of one financial instrument for those of another. Common types include interest rate swaps and currency swaps.
Hedging
Hedging means using financial instruments to offset the risk of adverse price movements. You hedge one investment by making another investment that moves in the opposite direction (negative correlation).
Arbitrage
Arbitrage is the simultaneous purchase and sale of the same (or similar) asset in different markets to profit from price discrepancies. Arbitrage is risk-free in theory and helps markets become more efficient.
Pledging of Shares
Promoters pledge their shares as collateral to take loans. It is a way to raise funds without selling their equity stake. High promoter pledge levels may be a governance concern for investors to watch.
Modes of Holding Securities Dematerialisation (Demat / Electronic Form)
Securities held electronically through a Depository Participant (DP) account. Most securities in India are now held in demat form via NSDL or CDSL. This eliminates the risk of loss, theft, or damage of physical certificates.
Rematerialisation (Physical Form)
Converting demat securities back into physical paper certificates. This process is called rematerialisation. Physical certificates are rare today and have largely been replaced by electronic holding.
Quick Revision Points for NISM Series XV Exam
- Primary market = new issue of securities; Secondary market = trading of existing securities
- Masala bonds are denominated in INR but issued outside India
- FCCB = bond + equity option (foreign currency)
- Futures = standardised + regulated; Forwards = customised + OTC (not standardised)
- Options = right but not obligation; Futures = obligation for both parties
- REITs invest in real estate; InvITs invest in infrastructure
- FPI money is considered "hot money" — can exit quickly
- FDI is long-term and stable; FPI is short-term and mobile
- Demat = electronic holding via depository (NSDL/CDSL)
- Commodity ETFs invest in physical commodities; Gold ETFs are the most popular
Continue Your NISM Research Analyst Preparation
This is Part 2 of 12 in our NISM Research Analyst Short Notes series. The next post covers Terminologies in Equity and Debt Markets — including face value, book value, EPS, PE ratio, duration, YTM, and bond types that are frequently tested in the NISM Series XV exam.
Test your understanding with free mock questions on Research Analyst Free Mock Test.