Professional Documents
Culture Documents
FS Mod-2
FS Mod-2
By Nandita Mohapatra
These bills are short-term liabilities (91-day, 182-day, 364-day) of the Government of
India
It is an IOU of the government, a promise to pay the stated amount after expiry of the
stated period from the date of issue.
Types
In India the treasury bills are issued by the Government of India only, not State Governments.
The three types of treasury bills issued are 91-day, 182-day and 364-day bills. They are issued
through auctions
Amounts
The minimum amount available is for Rs. 25,000 (US $579.72, as of 7 July, 2008). They are
further available in denominations of Rs. 25,000. They are redeemed at par and are issued at a
discounted rate. Treasury bills in India are issued under the Market Stabilization Scheme (MSS)
as well.
Auctions
Auctions are held every Wednesday for 91-day T-bills. Auctions for the 182-day and
364-day T-bills are held every other Wednesday. A calendar of T-bill actions can found
on the Reserve Bank of India website along with amounts to be auctioned, dates of the
auctions, and payment dates (via press releases before each auction). They are issued at
discount to the face value and at the end of maturity the face value is paid
The rate of discount and the corresponding issue price are determined at each auction
RBI auctions 91-day T-Bills on a weekly basis, 182-day T-Bills and 364-day T-Bills on a
fortnightly basis on behalf of the central government
Characteristics of Treasury Bills
No coupon and trade at a discount, meaning that the investor is not paid interest in increments
over the life of the investment, but instead the security is sold for an amount less than the face or
par value of the security. When the security reaches maturity, the investor is paid face value.
Interest = par value minus cost
3- and 6-month treasury bills are auctioned every Monday
one year treasury bills are auctioned every four weeks
Treasury Bills mature on Thursdays unless it’s a holiday, then they mature on the next business
day
Treasury Bills are quoted and traded on a discount yield that is converted to a bond equivalent
yield. Credit Risk: Low. Treasury bills are backed by the full faith and credit of the U.S.
Treasury.
Liquidity Risk: Low. Treasury bills are one of the most liquid securities in the market.
Market Risk: Low. The short duration allows for less price volatility
Advantages: Treasury bills are very liquid; they have active primary and secondary markets and
high availability.
Disadvantages: Low relative yield.
Equity Shares
Meaning: Equity shares are those shares which are ordinary in the course of company's business. They are
also called as ordinary shares. These share holders do not enjoy preference regarding payment of dividend
and repayment of capital.Equity shareholders are paid dividend out of the profits made by a company.
Higher the profits, higher will be the dividend and lower the profits, lower will be the dividend.
MODULE 2
By Nandita Mohapatra
(1) Owned capital: Equity share capital is owned capital because it is the money of the shareholders who
are actually the owners of the company.
(2)Fixed value or nominal value: Every share has fixed value or a nominal value. For example, the price
of a share is Rs. 10/- which indicates a fixed value or a nominal value.
(3) Distinctive number: Every share is given a distinct number just like a roll number for the purpose of
identification.
4) Attached rights: A share gives its owner the right to receive dividend, the right to vote, the
right to attend meetings, the right to inspect the books of accounts.
(5) Return on shares: Every shareholder is entitled to a return on shares which is known as
dividend. Dividend depends on the profits made by a company. Higher the profits, higher will be
the dividend and vice versa.
(6) Transfer of shares: Equity shares are easily transferable, that is if a person buys shares of a
particular company and he does not want them, he can sell them to any one, thereby transferring
the(7) Benefit of right issue: When a company makes fresh issue of shares, the equity
shareholders are given certain rights in the company. The company has to offer the new shares
first to the equity shareholders in the proportion to their existing share holding. In case they do
not take up the shares offered to them, the same can be issue to others. Thus, equity shareholders
get the benefits of the right issue.
(8) Benefit of Bonus shares: Joint stock companies
which make huge profits, issue bonus shares to their ordinary shareholders out of the accumulated profits.
These shares are issued free of cost in proportion to the number of existing equity share holding. In case
they do not take up the shares offered to them, the same can be issued to others. Thus, equity shareholders
get the benefits of the right issue.
9) Irredeemable: Equity shares are always irredeemable. This means equity capital
(10)Capital appreciation: The nominal or par value of equity shares is fixed but the market value
fluctuates. The market value mainly depends upon profitability and prosperity of the company. High
rate of dividend is paid with high rate of profit, the shareholders capital is appreciated through an
appreciation in the market value of shares. (i.e. higher the rate of dividend, higher the market value of
the shares.)
preference shares
The Company issue preference shares in addition to the equity shares in order to fully meet
the capital requirement. Preference shares are those which have preferential right to the
payment of dividend during the life-time of the company and a preferential right to the
return of capital when the company is wound up.
Dividends on preference shares have to be paid before dividends on ordinary shares.
MODULE 2
By Nandita Mohapatra
Dividends on ordinary shares may not be paid unless the fixed dividends on Dividends are
fixed like bond coupons, although there are usually provisions to not pay, or delay
payments.
Preference shareholders have a higher priority if a company is liquidated than ordinary
shareholders, although a lower priority than debt holders.
In the case of cumulative prefs, if the dividend is not paid in full, the unpaid amount is
added to the next dividend due.
Preference dividends are fixed, so they do not participate in increases (or decreases) in
profits as ordinary shareholders do.
preference shares is paid first.
Broadly speaking, preference share is a part of the share capital of a company which fulfils the
following two conditions:
1. In case of payment of dividends, it carries a preferential rights over equity shares for
payment of a fixed rate/amount of dividends.
2. In case of winding up or repayment of share capital of the company, a preferential right over
the Equity shares for repayment of paid-up amount of shares.
3)preference share holders are not owners of the company and do not enjoy any voting
right. Where as Equity Shares has voting right & they are the real owners of company.
4)Preference Shares have a finite tenure and carry a fixed rate of dividend where as
dividend to equity shares is payable rest of the dividend payable after preference share
holders.
The first ADR was introduced by JPMorgan in 1927, for the British retailer Selfridges&Co. There
are currently four major commercial banks that provide depositary bank services - JPMorgan,
Citibank, Deutsche Bank and the Bank of New York Mellon
Depository Receipts :
Depository Receipts are a type of negotiable (transferable) financial security, representing a security,
usually in the form of equity, issued by a foreign publicly-listed company. However, DRs are traded on
a local stock exchange though the foreign public listed company is not traded on the local exchange.
Thus, the DRs are physical certificates, which allow investors to hold shares in equity of other
countries. . This type of instruments first started in USA in late 1920s and are commonly known as
MODULE 2
By Nandita Mohapatra
American depository receipt (ADR). Later on these have become popular in other parts of the world also
in the form of Global Depository Receipts (GDRs). Some other common type of DRs are European
DRs and International DRs.
In nut shell we can say ADRs are typically traded on a US national stock exchange, such as the New
York Stock Exchange (NYSE) or the American Stock Exchange, while GDRs are commonly listed on
European stock exchanges such as the London Stock Exchange. Both ADRs and GDRs are usually
denominated in US dollars, but these can also be denominated in Euros.
When a foreign company wants to list its securities on another country’s stock exchange, it can do so
through Depository Receipts (DR) mode. . To allow creation of DRs, the shares of the foreign company,
which the DRs represent, are first of all delivered and deposited with the custodian bank of the depository
through which they intend to create the DR. On receipt of the delivery of shares, the custodial bank
creates DRs and issues the same to investors in the country where the DRs are intended to be listed.
These DRs are then listed and traded in the local stock exchanges of that country.
American Depository Receipts popularly known as ADRs were introduced in the American market in
1927. ADR is a security issued by a company outside the U.S. which physically remains in the country
of issue, usually in the custody of a bank, but is traded on U.S. stock exchanges. In other words, ADR is
a stock that trades in the United States but represents a specified number of shares in a foreign
corporation.
Thus, we can say ADRs are one or more units of a foreign security traded in American market. They are
traded just like regular stocks of other corporate but are issued / sponsored in the U.S. by a bank or
brokerage.
ADRs were introduced with a view to simplify the physical handling and legal technicalities governing
foreign securities as a result of the complexities involved in buying shares in foreign countries. Trading in
foreign securities is prone to number of difficulties like different prices and in different currency values,
which keep in changing almost on daily basis. In view of such problems, U.S. banks found a simple
methodology wherein they purchase a bulk lot of shares from foreign company and then bundle these
shares into groups, and reissue them and get these quoted on American stock markets.
For the American public ADRs simplify investing. So when Americans purchase Infy (the Infosys
Technologies ADR) stocks listed on Nasdaq, they do so directly in dollars, without converting them from
rupees. Such companies are required to declqare financial results according to a standard accounting
principle, thus, making their earnings more transparent. An American investor holding an ADR does not
have voting rights in the company.
The above indicates that ADRs are issued to offer investment routes that avoid the expensive and
cumbersome laws that apply sometimes to non-citizens buying shares on local exchanges. ADRs are
listed on the NYSE, AMEX, or NASDAQ.
Global Depository Receipt (GDR): These are similar to the ADR but are usually listed on exchanges
outside the U.S., such as Luxembourg or London. Dividends are usually paid in U.S. dollars. The first
GDR was issued in 1990.
MODULE 2
By Nandita Mohapatra
ADVANTAGES OF ADRs:
There are many advantages of ADRs. For individuals, ADRs are an easy and cost effective way to buy
shares of a foreign company. The individuals are able to save considerable money and energy by
trading in ADRs, as it reduces administrative costs and avoids foreign taxes on each transaction. Foreign
entities prefer ADRs, because they get more U.S. exposure and it allows them to tap the American
equity markets. .
American Depository Receipts popularly known as ADRs were introduced in the American market in
1927. ADR is a security issued by a company outside the U.S. which physically remains in the country
of issue, usually in the custody of a bank, but is traded on U.S. stock exchanges. In other words, ADR is
a stock that trades in the United States but represents a specified number of shares in a foreign
corporation.
Thus, we can say ADRs are one or more units of a foreign security traded in American market. They are
traded just like regular stocks of other corporate but are issued / sponsored in the U.S. by a bank or
brokerage.
ADRs were introduced with a view to simplify the physical handling and legal technicalities governing
foreign securities as a result of the complexities involved in buying shares in foreign countries. Trading in
foreign securities is prone to number of difficulties like different prices and in different currency values,
which keep in changing almost on daily basis. In view of such problems, U.S. banks found a simple
methodology wherein they purchase a bulk lot of shares from foreign company and then bundle these
shares into groups, and reissue them and get these quoted on American stock markets.
For the American public ADRs simplify investing. So when Americans purchase Infy (the Infosys
Technologies ADR) stocks listed on Nasdaq, they do so directly in dollars, without converting them from
rupees. Such companies are required to declqare financial results according to a standard accounting
principle, thus, making their earnings more transparent. An American investor holding an ADR does not
have voting rights in the company.
The above indicates that ADRs are issued to offer investment routes that avoid the expensive and
cumbersome laws that apply sometimes to non-citizens buying shares on local exchanges. ADRs are
listed on the NYSE, AMEX, or NASDAQ.
Global Depository Receipt (GDR): These are similar to the ADR but are usually listed on exchanges
outside the U.S., such as Luxembourg or London. Dividends are usually paid in U.S. dollars. The first
GDR was issued in 1990.
ADVANTAGES OF ADRs:
There are many advantages of ADRs. For individuals, ADRs are an easy and cost effective way to buy
shares of a foreign company. The individuals are able to save considerable money and energy by
trading in ADRs, as it reduces administrative costs and avoids foreign taxes on each transaction. Foreign
entities prefer ADRs, because they get more U.S. exposure and it allows them to tap the American
equity markets. .
MODULE 2
By Nandita Mohapatra
The shares represented by ADRs are without voting rights. However, any foreigner can purchase these
securities whereas shares in India can be purchased on Indian Stock Exchanges only by NRIs or PIOs or
FIIs. The purchaser has a theoretical right to exchange the receipt without voting rights for the shares
with voting rights (RBI permission required) but in practice, no one appears to be interested in exercising
this right.
What is a Debenture?
A Debenture is a debt security issued by a company (called the Issuer), which offers to pay interest in lieu
of the money borrowed for a certain period. In essence it represents a loan taken by the issuer who pays
an agreed rate of interest during the lifetime of the instrument and repays the principal normally, unless
otherwise agreed, on maturity.
These are long-term debt instruments issued by private sector companies. These are issued in
denominations as low as Rs 1000 and have maturities ranging between one and ten years. Long maturity
debentures are rarely issued, as investors are not comfortable with such maturities
Debentures enable investors to reap the dual benefits of adequate security and good returns. Unlike other
fixed income instruments such as Fixed Deposits, Bank Deposits they can be transferred from one party
to another by using transfer from. Debentures are normally issued in physical form. However,
corporates/PSUs have started issuing debentures in Demat form. Generally, debentures are less liquid as
compared to PSU bonds and their liquidity is inversely proportional to the residual maturity. Debentures
can be secured or unsecured.
· Non Convertible Debentures (NCD): These instruments retain the debt character and can not be
converted in to equity shares
· Partly Convertible Debentures (PCD): A part of these instruments are converted into Equity shares in
the future at notice of the issuer. The issuer decides the ratio for conversion. This is normally decided at
the time of subscription.
· Fully convertible Debentures (FCD): These are fully convertible into Equity shares at the issuer's notice.
The ratio of conversion is decided by the issuer. Upon conversion the investors enjoy the same status as
ordinary shareholders of the company.
· Optionally Convertible Debentures (OCD): The investor has the option to either convert these
debentures into shares at price decided by the issuer/agreed upon at the time of issue.
· Secured Debentures: These instruments are secured by a charge on the fixed assets of the issuer
company. So if the issuer fails on payment of either the principal or interest amount, his assets can be sold
to repay the liability to the investors
MODULE 2
By Nandita Mohapatra
· Unsecured Debentures: These instrument are unsecured in the sense that if the issuer defaults on
payment of the interest or principal amount, the investor has to be along with other unsecured creditors of
the company
You can position yourself for a big market move even when you don' t know which way prices
will move.
You can benefit from a stock price rise without incurring the cost of buying the stock outright.
Futures derivatives trading
Future trading can be done on stocks as well as on Indices like IT index, Auto index, Pharma
index etc.
Important - Future contract get expires at every last Thursday of every month.
If you buy October month expiry future contract then you have to sell it within last Thursday of
October month. Likewise you can buy two months and three months expiry period future
contract.
You can buy maximum of three month expiry period.
For example - suppose this is month of October then you have to buy till maximum month of
December expiry and you have to sell it within last Thursday of December month. You can sell
anytime between these periods.
Lot size (group of stocks in one future contract) varies from future to future contract. For e.g.
Reliance Industries future lot size has 150 quantities of shares while a Tata Consultancy service
has 250 shares.
In the same manner all futures have different lot sizes decided by SEBI (Securities Exchange
Board of India). The margin (in other words price of one lot size) varies on daily basis based on
its stocks closing price.
Future trading can be done on selected stocks listed under Nifty and Jr. Nifty and not on all
stocks.
The price of future contract is determined by its underlying stock.
Important - You can’t buy future contract of expiry period of not more than 3 months.