Before going into more detail, first we need to understand the term Securities. Like what is securities, how it comes into securities marketplace, what are the types etc.
Organisations occasionally need to raise cash (or capital) in order to expand their business through, for example, buying new premises, building new factories or acquiring other companies. The options open to such organisations for raising the necessary capital includes:
- Borrowing cash from banks.
- Selling a part of their existing business.
- Selling part ownership in the company (issuing shares).
- Borrowing cash from investors (issuing bonds).
So in this both shares and bonds are generally known as securities.
The role of the securities marketplace here are:
- Facilitates the process of bringing new securities to the marketplace.
- Provides a structured and regulated method of buying and selling existing securities for the protection of the investors.
The two most common types of securities issued by companies are equity (also known as shares or stock) and debt (also known as bonds).
An equity represents ownership in a company. The purchase of shares by an investor gives the investor partial ownership in that company (a share in the company). The issuer effectively dilutes the ownership of the company by spreading ownership across hundreds or thousands of investors, depending upon the size of the company and the number of shares in issue.
The issue of equity provides the company with permanent cash. In other words when the company sells shares initially, there are no intentions to repay to shareholders the capital received. However on an exceptional basis, an issuer may decide to buy back shares from the shareholders.
If an investor wishes to sell its shareholding, the shares are not normally purchased by the issuer but are sold in the marketplace and ultimately purchased by some other investor(s).
A debt issue reflects a borrowing of a specific amount of cash by an issuer (such as a company, government or government agency) in a specified currency. The purchase of bonds by an investor is effectively on a promise by the issuer to repay the capital to the investor at a future point in time(i.e. maturity date). Also issuer will make a periodic payments of interest to the investor at predefined points in time and (normally) at a predefined rate of interest. The interest on bonds is commonly referred to as coupon.
An investor may wish to sell its bond-holding. The bonds are not normally purchased by the issuer but are sold in the marketplace to another investor(s), as in the case of equities.
In next blog, I will describe some other components of the securities marketplace. So stay tuned.
Happy Learning !!!
Book: Securities Operations: A Guide to Trade and Position Management by Michael Simmons