Introduction to Securities and Securities Market

A security is a tradable financial instrument that represents either ownership (equity), a creditor relationship (debt), or the right to acquire or sell an asset (derivative). Under the Indian Companies Act and SEBI regulations, a security must be capable of being transferred or assigned, and it creates a legally enforceable right for the holder.

Understanding securities is fundamental because every listed instrument that a research analyst evaluates—shares, bonds, derivatives, mutual fund units—falls under this definition. The characteristics of a security determine how it is priced, the risks it carries, and the disclosure obligations of the issuer.

For the NISM exam, you will be asked to identify securities, differentiate them from non‑securities (like cash or physical assets), and apply the definition in scenario‑based questions. A common trap is to treat a contract for services as a security; remember that a security must confer a financial right that can be bought or sold.

• Ownership right – equity shares.
• Creditor right – bonds, debentures.
• Contractual right – futures, options.

Indian securities are broadly classified into five categories. Equity securities represent ownership in a company and include equity shares, employee stock options and convertible instruments. Debt securities create a creditor relationship; typical examples are government bonds, corporate debentures and non‑convertible debentures (NCDs). Derivative securities derive their value from an underlying asset and include futures, options and swaps.

Hybrid securities combine features of equity and debt, such as preference shares, convertible bonds and perpetual debentures. Mutual fund units are collective investment schemes that pool investor money to invest in a diversified portfolio; each unit represents a proportionate interest in the fund's assets.

Exam questions often ask you to match a security type with its key features, such as voting rights, dividend entitlement, maturity, and convertibility. Remember the mnemonic EDDH‑M (Equity, Debt, Derivative, Hybrid, Mutual) to avoid mixing up categories.

The primary market is where new securities are issued for the first time. Companies raise fresh capital through Initial Public Offerings (IPOs), Follow‑on Public Offerings (FPOs) or private placements. The proceeds go directly to the issuer, and SEBI’s listing regulations govern disclosure, pricing and allocation.

The secondary market provides a platform for existing securities to be bought and sold among investors. Stock exchanges such as BSE and NSE facilitate price discovery, liquidity and continuous trading. Transactions in the secondary market do not affect the issuer’s cash flow, but they impact the market price, which is a critical input for valuation models used by research analysts.

In the exam, you may be presented with a scenario and asked to identify whether a transaction occurs in the primary or secondary market. A typical mistake is to label a rights issue as a secondary market activity; remember that any issuance that creates fresh shares belongs to the primary market.

The securities market ecosystem includes issuers, investors, intermediaries and regulators. Issuers are companies or governments that create securities to raise funds. Investors range from retail individuals to institutional entities such as mutual funds, insurance companies and foreign portfolio investors (FPIs).

Intermediaries facilitate trading and include stockbrokers, depositories (NSDL, CDSL), clearing corporations, merchant bankers and rating agencies. Each intermediary has specific registration and compliance requirements under SEBI.

For a research analyst, understanding the role of each participant helps in assessing market depth, liquidity risk and the reliability of information flow. Exam questions may test your knowledge of who must be SEBI‑registered and the functions of depositories versus clearing houses.

India’s securities market operates through both organized exchanges and over‑the‑counter (OTC) platforms. The two major stock exchanges—Bombay Stock Exchange (BSE) and National Stock Exchange (NSE)—run electronic order‑driven systems that ensure transparency and real‑time price discovery.

The OTC market handles securities that are not listed on exchanges, such as certain debt instruments and derivatives. While OTC trading offers flexibility, it is less regulated and carries higher counter‑party risk, which analysts must factor into credit assessments.

Regulatory oversight is provided by SEBI, which sets listing norms, market‑making requirements, and surveillance mechanisms. Understanding the distinction between exchange‑traded and OTC securities is essential for answering scenario‑based valuation and risk‑management questions in the exam.

The Securities and Exchange Board of India (SEBI) is the primary regulator of the securities market. SEBI formulates regulations on listing, insider trading, market intermediaries, and investor protection. All listed companies must comply with SEBI’s Listing Obligations and Disclosure Requirements (LODR).

In addition to SEBI, the Reserve Bank of India (RBI) regulates certain debt securities, especially those issued by banks and financial institutions. The Ministry of Corporate Affairs (MCA) governs company law aspects, such as share capital structure and shareholder rights.

Exam questions may ask you to identify the regulator responsible for a particular market activity, such as who monitors insider trading (SEBI) versus who oversees bank debentures (RBI). Knowing the jurisdictional boundaries prevents common errors.

Accurate knowledge of securities definitions and market structure enables analysts to correctly classify instruments, assess liquidity, and apply appropriate valuation models. For example, equity valuation uses dividend discount or free‑cash‑flow models, while debt valuation relies on yield‑to‑maturity calculations.

Understanding primary versus secondary market dynamics helps analysts interpret price movements after an IPO or a rights issue, which often cause short‑term volatility. Recognising the role of intermediaries, such as depositories, also clarifies settlement risk and the timing of cash flows in financial modelling.

Finally, familiarity with SEBI regulations ensures that analysts can evaluate compliance risk, a factor that influences credit ratings and equity risk premiums. The NISM exam frequently tests these linkages through scenario‑based multiple‑choice questions.