Inroduction to financial instruments

Often investors invest through financial assets or financial instruments or securities. Investments that represent debt, ownership of a business or a legal right to acquire a part of ownership interest in business are called securities. There are a number of financial instruments which are traded in the money market. The important financial instruments are Treasury Bills, Certificates of Deposits, Commercial Bills, Commercial Papers, etc. The money market instruments have maturity period upon one year. Money market instruments are highly liquid, short-term debt instruments which mature in less than 12 months, and normally pay continuously varying returns. These involve no or very little degree of risk. The money market instruments pay return to investors in the form of discount at the time of issue. On the other hand, Capital market has instruments of longer maturity period. These instruments are :

Ownership Securities :

  • Equity Shares,
  • Preference Shares, and
  • Cumulative Convertible Preference Shares.

Debt Securities :

  • Non-convertible Debentures,
  • Partly Convertible Debentures,
  • Zero-Interest Fully Convertible Debentures,
  • Optionally Convertible Debentures,
  • Deep Discount Bonds.

Mutual Fund Units :

  • Income Schemes,
  • Growth Schemes,
  • Sectoral Schemes,
  • Equity Schemes,
  • Money Market Schemes.

Apart from these capital market securities, other investment options available, particularly to individual investors, are Savings Bank accounts, Fixed Deposits in banks, Post-Office Savings Schemes, Unsecured deposits in companies, etc.

A financial instrument (security) is issued under a set of terms and conditions about the payment of interest/dividend to the holder, maturity life, redemption value, etc. Equity shares and debentures are issued by corporate’s under virtually a standard set of terms and conditions-Some of these are statutory terms such as the preference shares in India must be redeemable within a maximum period of 20 years; or rate of dividend on cumulative convertible preference shares need not exceed 10% p.a., or debentures must be credit rated, etc.

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