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One of the aspects of securities trading is the imposition of margins by the authorities on such trading particularly on carry-forward transactions. The purpose of margins can be stated in various ways. Margins are required to cover defaults in the event of adverse price movements. They are stipulated on the basis of the risk involved in the securities. They are also required to regulate or restrain forward trading, overtrading and unhealthy, reckless, excessive speculation by putting financial burden or curbs on the traders. In essence, they are meant to reduce the volume of trading.

Ordinary Shares

Ordinary shares are ownership securities, which have certain advantages in favour of the issuing companies and investors depending on their attitude to risk-taking. Investment in this financial instrument is permanent but not illiquid. Due to the existence of a fairly active secondary market in shares, investors can turn their shareholder into cash fairly quickly. Because of the high risk, which he bears, the investor can participate in the earning and wealth of the company without limit. In a period of inflation since the value of holding increases, ordinary share are expected to be a hedge against inflation. From the point of view of the company, it is advantageous because dividend payments on ordinary shares are not mandatory and there is no need to refinance the capital raised through the issue of ordinary shares. As in other countries, this instrument is quite popular with individual investors in India. The face value of ordinary shares in India varies from Re 1 to Rs 1,000 but the most common and popular denomination of shares is Rs 10.

Preference Shares

A preference share is a complex financial instrument with a number of modifications to its general characteristics. Strictly speaking it is an ownership security like an ordinary share, but carries a fixed rate of return (dividend) like a debenture. The holders of preference shares are entitled to income after the claims of creditors of the company have been met, but before ordinary shareholders receive any income. Because of these modifications, one comes across the following types of preference shares in the market:
(a) cumulative and non-cumulative,
(b) convertible and non-convertible,
(c) redeemable and non-redeemable,
(d) participating and non-participating.

On cumulative preference shares, if dividend is skipped in any period/periods, it has to be paid subsequently.

Convertible preference shares can be converted into ordinary share on terms and condition fixed at the time of issue of such shares.

Redeemable preference shares mature in a fixed period of time and for all practical purpose are regarded as a debt security like debentures.

Participating preference shareholders can earn a higher dividend than the fixed one if the company makes good profits.

Debentures or Bonds

Debenture or bond is a creditorship security with the following characteristics :

A fixed rate of return
Fixed maturity period
Perfect income certainty
Low capital uncertainty

While bonds are secured by tangible physical assets of the issuing company in U.S., debentures are secured only by the general creditworthiness of the company. There is no such distinction in U.K. and India where the industrial debenture can be of both types i.e. secured or unsecured. There are different kind of debentures:

Partially convertible
Rights, etc.

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