Types of Securities
1.Equity Securities
- Definition: Equity securities represent ownership in a company and entitle the holder to a share of the profits and assets.
- Examples: Common stocks, preferred stocks.
- Characteristics:
- Ownership stake in the issuing company.
- Potential for dividends and capital gains.
- Voting rights (common stocks).
- Higher risk compared to debt securities but potentially higher returns.
2.Debt Securities
- Definition: Debt securities represent a loan made by the investor to the issuer (typically a corporation or government) in exchange for regular interest payments and the return of principal at maturity.
- Examples: Bonds, debentures, notes, and certificates of deposit.
- Characteristics:
- Fixed income from regular interest payments.
- Repayment of principal at maturity.
- Generally lower risk compared to equity securities but lower returns.
- No ownership stake or voting rights.
Government Securities
- Government securities are debt instruments issued by the government to finance its fiscal deficit and manage liquidity. They are considered safe investments due to the low risk of default. The primary types include:
1. Treasury Bills (T-Bills)
- Definition: Short-term securities issued by the Government of India to meet short-term liquidity requirements.
- Maturity: 91 days, 182 days, and 364 days.
- Characteristics:
- Issued at a discount to face value and redeemed at face value.
- No interest payments; the return is the difference between the purchase price and the face value.
2. Cash Management Bills (CMBs)
- Definition: Similar to T-Bills but with flexible maturity periods, issued to meet temporary cash requirements of the government.
- Maturity: Less than 91 days.
- Features:
- Issued at a discount and redeemed at face value.
- Used for managing short-term mismatches in government cash flows.
3. Dated Securities
- Definition: Long-term securities with a fixed or floating interest rate, issued by the Government of India.
- Maturity: Typically ranges from 5 to 30 years.
- Features:
- Pay periodic interest (coupon payments) and repay the principal at maturity.
- Used for long-term funding needs of the government.
4. State Development Loans (SDLs)
- Definition: Debt securities issued by state governments to finance their fiscal deficit and development projects.
- Maturity: Usually 10 years.
- Features:
- Pay periodic interest and repay the principal at maturity.
- Considered safe investments with returns slightly higher than central government securities.
These government securities play a vital role in maintaining the country’s economic stability and providing secure investment options for individuals and institutions.