NISM Research Analyst Chapter 2: Introduction to Securities Market – Part 1

In Chapter 1: Introduction to Research Analyst Profession we tried to understand what the Research Analyst does. Now from here we will go in deep of what they know and what we need to learn to become a Research Analyst.

What is a Securities Market?

• A securities market is where financial instruments like shares, bonds, and mutual funds are issued and traded.
• It connects investors with companies/governments.
• Term “securities” has been identified in the section 2(h) of Securities Act, 1956 (SCRA).

Now here in this section, I would explore the major financial instruments available in Securities Market each with distinct risk and return characteristics that define its suitability for an investor. Let’s start with the first one…

Equity Shares

• Equity shares are also called ordinary shares and are issued by companies.
• When you buy equity shares of a company, you become a part-owner of that company.
• Example: If TATA Group has 1,00,000 shares and you buy 1,000, then you own 1% of the TATA Group.

Debentures

• Debentures are instruments for raising long term debt.
• When you buy a debenture, you are lending money to the company (not becoming an owner).
• In return, the company promises to pay you fixed interest at regular intervals.
• Example: If a company issues a ₹1,000 debenture at 10%, you will get ₹100 every year as interest.

There are a variety of debentures such as fully convertible, non-convertible and partly convertible debentures. I will explain you each of them one by one:

Fully Convertible Debentures (FCDs)

• These debentures are completely converted into equity shares of the company after a fixed time.
• After conversion, investor becomes a shareholder.
• No repayment of money, only shares are given.

Example:
You buy 10 FCDs of ₹1,000 each = ₹10,000.
After 3 years, company converts them into 100 equity shares of ₹100 each.
Now you are a shareholder, not a lender.

Partly Convertible Debentures (PCDs)

• A part of the debenture is converted into equity shares, and the remaining part is repaid in cash.
• Investor becomes partly a shareholder and partly a creditor.

Example:
You buy 10 PCDs of ₹1,000 each = ₹10,000.
After 3 years –
50% (₹5,000) is converted into equity shares.
And, remaining ₹5,000 is repaid in cash with interest.

Non-Convertible Debentures (NCDs)

• These debentures are pure debt instruments, cannot be converted into shares.
• Investor only gets interest at regular intervals + repayment of principal at maturity.
• Purely a loan, not an ownership.

Example:
You buy NCDs worth ₹10,000 at 10% interest.
Every year → you get ₹1,000 interest.
At maturity (say 5 years) → you get back ₹10,000 principal.

Easy way to remember:
FCD = 100% shares
PCD = Some shares + Some cash
NCD = Only cash, no shares

Warrants

• A warrant is a financial instrument that gives the holder the right (but not the obligation) to buy a company’s shares at a fixed price in the future.
• It’s like a coupon or option to buy shares later at a pre-decided price.

Let me explain this in more simple term: (You are not buying the share immediately, you are buying the right to buy it in the future. It is not mandatory to buy it, you have an option to buy or not.)

Example:
A company issues a debenture of ₹1,000 along with a warrant.
The warrant allows you to buy 1 share of the company at ₹200 within 3 years.

If after 3 years, the share price is ₹300 → you can buy at ₹200 → profit of ₹100.
If the share price is ₹150 → you don’t use the warrant (ignore it).

Easy way to remember:
Warrant = Future Ticket to Buy Shares at Fixed Price

NAV (Net Asset Value)

• NAV is the value of one unit of a mutual fund.
• In simple words, NAV tells you how much 1 unit of the fund is worth today.
• If the value of fund’s investments (shares, bonds) goes up, NAV increases.
• If value goes down, NAV decreases.
• Example: If stocks in the fund rise by 10%, NAV may also rise from ₹10 to ₹11.

Easy way to remember:
NAV = Price tag of 1 unit of a mutual fund

Mutual Funds

• A mutual fund is like a pool of money collected from many investors.
• This money is managed by a professional called a Fund Manager, who invests it in stocks, bonds, gold, etc.
• Investors get units of the fund, and the value of each unit is called NAV (Net Asset Value).

Example:
1,000 people each invest ₹10,000, total pool = ₹1 crore (10,000 x 1000).
Fund manager invests this in different companies’ shares and bonds.
If investments grow, NAV goes up, investors earn profit.

Types of Mutual Funds

Based on Structure

• Open-ended Funds → Can buy/sell units anytime (most common).
• Closed-ended Funds → Can invest only during initial offer period, then traded on stock exchange.

Based on Asset Class

• Equity Funds → Invest mainly in shares (high risk, high return).
• Debt Funds → Invest in bonds, government securities (low risk, stable return).
• Hybrid Funds → Mix of equity + debt.
• Money Market Funds → Short-term safe investments.

Special Category

• ELSS (Equity Linked Savings Scheme) → Tax saving + 3 years lock-in.
• Index Funds → Copy stock market index (like Nifty 50).
• Sectoral Funds → Invest in a specific sector (IT, Pharma, Banking).

Easy way to remember:
Mutual Fund = Team investment → Fund manager plays for you

ETF (Exchange Traded Fund)

• An ETF (Exchange Traded Fund) is a type of mutual fund that is traded on the stock exchange like a share.
• It combines the features of mutual funds (diversification) and shares (easy trading).
• ETFs’ expense ratios are typically lower than that of mutual fund scheme.

Types of ETFs

• Index ETFs → Track stock market index (e.g., Nifty 50 ETF, Sensex ETF).
• Gold ETFs → Invest in physical gold. 1 unit = usually 1 gram of gold.
• Debt ETFs → Invest in government bonds or corporate debt.
• Sectoral/Thematic ETFs → Focus on specific sectors (IT ETF, Banking ETF).
• International ETFs → Track foreign markets (e.g., Nasdaq ETF).

Easy way to remember:
ETF = Basket of securities that you can buy/sell like a share

So, Chapter 2 – Introduction to Securities Market gives a complete overview of the instruments and participants in the securities market. In the Part 2 of Introduction to Securities Market, I’ll move forward to cover the rest of the important instruments of this chapter.