NISM 15 Chapter 2: Introduction to Securities Market | Study Notes by Dhaval Visariya

NISM Series XV - Chapter 2: Introduction to Securities Market

In this guide, I break down the structure of the Indian Securities Market. Understanding the instruments (Equity, Debt, Hybrids) and the participants (FPIs, Mutual Funds, Custodians) is essential for any aspiring Research Analyst.

1. What are Securities?

Securities are transferable financial claims. They represent either Ownership (Equity) or Indebtedness (Debt).

The Financial Market Ecosystem:

  • Investors: Providers of funds.

  • Borrowers: Seekers of funds (Companies/Government).

  • Intermediaries: Infrastructure providers (Exchanges, Brokers).

  • Regulators: SEBI, RBI, MCA (Ensuring orderly processes).

2. Key Investment Instruments

A. Equity vs. Debt

  • Equity Shares: Fractional ownership. Shareholders bear the risk and enjoy rewards (Dividends/Capital Appreciation).

  • Debentures/Bonds: Raising debt. Can be Unsecured or Secured.

    • FCD (Fully Convertible): Entire value converts to shares.

    • PCD (Partly Convertible): Only a portion converts; the rest is redeemed as debt.

    • NCD (Non-Convertible): Pure debt, no conversion, repaid on maturity.

B. Hybrid & Specialized Products

  • Preference Shares: Have priority over equity for dividends and capital repayment during winding up.

  • Warrants: The right (not obligation) to buy shares at a pre-determined price later.

  • REITs & InvITs: Investment vehicles for Real Estate and Infrastructure projects.

  • Depository Receipts (ADRs/GDRs/IDRs): Represent shares of a foreign company traded locally.

3. Market Structure: Primary vs. Secondary

FeaturePrimary Market (New Issue)Secondary Market (Stock Exchange)
DefinitionWhere securities are created and sold for the first time.Where already issued securities are traded.
ParticipantsIssuer (Company) and Investor.Investor and Investor (Issuer is not involved).
ExamplesIPO, FPO, Rights Issue, Private Placement.NSE, BSE, OTC Markets.

4. Key Market Participants (The Intermediaries)

To ensure smooth trading, several entities work behind the scenes:

  • Stock Exchanges (NSE/BSE): The trading platform.

  • Depositories (NSDL/CDSL): Hold securities in electronic (Demat) form.

  • DP (Depository Participant): The bridge between you and the Depository (e.g., your broker).

  • Clearing Corporation: Acts as a central counterparty; guarantees settlement.

  • Custodians: Hold funds/securities for large institutional clients (FPIs/Insurance).

  • Merchant Bankers: Manage the process of an IPO/FPO.

5. Institutional vs. Retail Participants

  • Institutional: Mutual Funds, Insurance Companies, Pension Funds, FPIs, and AIFs (Alternative Investment Funds - Categories I, II, and III).

  • Retail: Individual investors like you and me. This includes HNIs (High Net-worth Individuals).

  • Proxy Advisors: Firms that advise shareholders on how to vote on company resolutions.

6. Understanding Derivatives & Trades

Derivatives derive value from an underlying asset (Stock, Index, Commodity).

  1. Futures: Standardized exchange-traded contracts to buy/sell at a future date.

  2. Options: * Call Option: Right to BUY.

    • Put Option: Right to SELL.

  3. Forward Contracts: Directly negotiated (OTC), non-standardized.

Types of Trade Settlement:

  • Cash (T+0): Same-day settlement.

  • Tom (T+1): Next-day settlement.

  • Spot (T+2): Settlement after two business days (Standard for Indian Equity).

7. Key Concepts: Hedging, Arbitrage & Speculation

  • Hedging: Reducing risk by taking an opposite position.

  • Arbitrage: Profit from price differences of the same asset in two different markets.

  • Speculation: Taking a view on future price movements to make a profit.

  • Dematerialization: Converting physical certificates to electronic form.

Dhaval’s Study Tip for Chapter 2:

Pay close attention to the AIF Categories and the role of the Clearing Corporation. These are high-weightage topics for the MCQ section!

Dhaval Visariya

AMFI Registered Distributor (ARN-327925) | Software Developer & Finance Enthusiast

Connect with me:
LinkedIn | Telegram | YouTube | GitHub | Medium

Disclaimer: I am an AMFI Registered Mutual Fund Distributor. Views expressed here are for educational purposes. Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
📧 Contact: info.apollofinancialservices@gmail.com

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