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Margins
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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.
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Ordinary Shares
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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.
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Preference Shares
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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.
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Debentures or Bonds
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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:
Convertible
Non-convertible
Partially
convertible
Registered
Bearer
Redeemable
Perpetual
Callable
Rights,
etc.
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