Unit-1
INTRODUCTION
Concept of Securities
Securities are the financial assets that represent claim on the income and assets of an entity. In other
words, a security is the legal representation of the right that allows holders to receive prospective future
benefits under stated terms and conditions. Common stock, preferred stock, bond, treasury bill,
commercial paper, banker’s acceptance, certificate of deposits, etc. are the examples of Securities.
Securities Market
A security market (or financial market) can be defined as a mechanism bringing together buyers and
sellers of financial assets in order to facilitate trading. Alternatively, security market is a place or places
where securities are bought and sold, the facilities and people engaged in such transactions, the demand
for and availability of securities to be traded, and the willingness of buyers and sellers to reach
agreement on sales. Security market helps in transferring surplus funds from one sector to another sector
who needs the funds.
Types of Securities Markets
1. Money and capital market
2. Primary and secondary market
3. Brokers and Dealers markets
Money market and Capital Market
On the basis of maturity of securities, security market is classified as money market and capital market.
The financial market in which short term (one year or less) and highly liquid debt securities are traded
is called financial market. Money market provides low return and low risk. Money market facilitates
flow of short-term fund. Investors can buy and sell short term securities such as Treasury bills,
commercial papers, banker’s acceptance, etc. in the money market.
Capital market involves the trading of securities having a life span longer than one year. All long-term
securities issued by corporations and government such as common stock, preferred stock, corporate
bonds, government bonds are the instruments of capital market. Investors can buy and sell the long-
term securities in the capital market.
Primary Market and Secondary Market
A) Primary Market
Capital market is classified as primary and secondary market. It is also known as the New Issue Market.
Primary market is the market for the trading of new securities never issued before. A primary market is
a financial market in which new issue of a security (stocks, bonds, etc.) are sold to initial buyers by the
corporation or government agency borrowing the funds. Primary markets are facilitated by underwriting
groups consisting of investment banks that set a beginning price range for a given security and oversee
its sale to investors. Once the initial sale is complete, further trading is conducted on the secondary
market, where the bulk of exchange trading occurs each day
Its primary function is raising financial capital to support new investments in buildings, equipment and
inventories. The issuers can use the services of investment bankers in the primary market. The method
of issuing securities in the primary market are as follows:
a) Private placement: A private placement is the sell of security to only one or few investors.
Securities are not issued for general public. In case of private placement, entire securities are
sold to few big institutional investors such as insurance companies, investment companies,
pension funds, etc.
b) Public offering: This is the most common way to issue securities to the general public. If
securities are issued to general public, it is called public offering. There are two ways of public
offering; initial public offering and further public offering.
i) Initial Public Offering (IPO): An initial public offering, or IPO, generally refers to when
a company first sells its shares to the public. The Initial Public Offering IPO Process is
where a previously unlisted company sells new or existing securities and offers them to the
public for the first time.
ii) Further Public Offering (FPO): A Further Public Offering (FPO) is an issuing of shares
to general investors by a Public company that is already listed on Nepal Stock Exchange
Limited (NEPSE). FPO is essentially a further issue of public share by a company that is
already publicly listed and has gone through the IPO process. FPOs are popular methods
for companies to raise additional share capital in the capital market.
c) Right offering or Right issue: Right offering is the issue of additional shares to existing
shareholders on the pro-rata basis. In right offering, issuing corporation allows existing
shareholders the right to subscribe to additional shares on a pro-rata basis.
When a company wants to raise more capital from existing shareholders, it may offer the
shareholders more shares at a price discounted from the prevailing market price. The number
of shares offered is on a pro-rata basis. This process is known as a Rights Issue.
B) Secondary Market
A secondary market is a financial market in which previous securities are resold. Secondary market is
the market for the existing securities. Second hand securities are bought and sold in the secondary
market. Interestingly, the corporations whose securities are traded in the secondary market are not
involved in the transaction. The transactions take place between investors to investors. Brokers, dealers
& market makers facilitate trading of securities in this market. The main function of secondary market
is to provide liquidity to the buyer of securities. The transactions are more in secondary market than the
primary market.
Secondary markets may be classified as organized securities exchange and over the counter market. The
listed securities are only traded in organize securities exchange. The organized exchanges are broker
markets. In over-the-counter (OTC) market, securities which are not listed in the organized securities
exchange are also traded. The OTC markets are dealer markets.
Broker Markets & Dealer Markets
Secondary markets may be classified as organized securities exchange and over the counter market.
A) Broker Markets
Broker markets consist of the organized exchange where buy and sell orders of investors are executed
through the licensed brokers. The broker markets may be organized exchanges, future exchanges and
options exchanges. In case of Nepal, Nepal Stock Exchange (NEPSE) is the only national stock
exchange. Particularly, it the only one dominant broker market in Nepal.
B) Dealer Markets:
A dealer market is a financial market mechanism wherein multiple dealers post prices at which they
will buy or sell a specific security or instrument. In a dealer market, a dealer – who is designated as a
“market maker” – provides liquidity and transparency by electronically displaying the prices at which
it is willing to make a market in a security, indicating both the price at which it will buy the security
(the “bid” price) and the price at which it will sell the security (the “offer” price). Bonds and foreign
exchanges trade primarily in dealer markets, while stock trading on the NASDAQ is a prime example
of an equity dealer market.
Security Analysis
The security analysis process involves the analysis and evaluation of different financial instruments like
bonds, stock, or any other security where funds can be invested to earn good returns. The study helps
determine the risk and return opportunity, allowing investors to decide whether they should put their
money in them to make returns or whether there are better opportunities available.
Basically, there are two ways of security analysis;
1) Fundamental Analysis
The fundamental security analysis is a type of security analysis that is an evaluation
procedure of securities where the primary goal is to calculate the intrinsic value. It studies the
fundamental factors that affect a stock's intrinsic value, such as the company's profitability
statement and position statements, managerial performance, future outlook, present industrial
conditions, and the overall economy.
2) Technical Analysis
This type of security analysis is a price forecasting technique that considers only historical
prices, trading volumes, and industry trends to predict the security's future performance. It
studies stock charts by applying various indicators, assuming every fundamental input has
been factored into the price.