Economy Key Terminologies — Security Market in India
1. Previous Year Questions (UPSC)
Context: Understanding security market terminologies is crucial for UPSC preparation. The following terms have been asked in previous years' examinations (2021-2023).
| Year | Term | Explanation |
|---|---|---|
| 2023 | Intangible Asset | An asset that is not physical in nature, such as a patent, brand, trademark, or copyright. Businesses can create or acquire intangible assets. Can be indefinite (brand name) or definite (legal agreement). |
| 2023 | Beta | A numeric value that measures the fluctuations of a stock to changes in the overall stock market. |
| 2023 | Asset Allocation | An investment strategy that a portfolio manager uses to balance risk and reward. Helps decide which financial security and asset to work in the market. |
| 2023 | Arbitrage | The process of simultaneous buying and selling of an asset from different platforms, exchanges or locations to cash in on the price difference. Only the price difference is captured as the net pay-off. |
| 2023 | Basis Risk | A type of systematic risk that arises where perfect hedging is not possible. |
| 2022 | Convertible Bonds | Bonds that can be converted into a predetermined number of shares of common stock. Offer potential for capital appreciation if stock price increases while providing fixed income through coupon payments. |
| 2022 | Non-Convertible Debentures (NCDs) | Debentures that cannot be converted into the equity of the issuing company. |
| 2022 | Inflation Indexed Bonds (IIBs) | Government bonds indexed to inflation. The principal and interest payments are adjusted based on inflation rate, protecting investors against inflation. |
| 2021 | Bond Yield | The return on investment that an investor receives from holding a bond. Calculated as annual interest payment divided by the bond's current market price. |
| 2021 | Demat Account | A dematerialised account that holds securities in electronic form. Eliminates the need for physical certificates and provides a convenient way to buy, sell, and transfer securities. |
| 2021 | NDS-OM | Negotiated Dealing System-Order Matching — an electronic platform used by the Reserve Bank of India (RBI) for trading government securities. Allows market participants to place bids and offers and matches them automatically. |
2. Important Terms in News
Context: These security market terms frequently appear in financial news, policy discussions, and are essential for UPSC aspirants to understand.
Bonds & Debt Instruments
- Gilt Edged Security: Risk-free government securities that are considered the highest quality securities available. (Note: In the document, it appears as both "risky" and "risk-free" — standard economic literature defines G-Secs as risk-free gilt-edged instruments).
- Masala Bond: Rupee-denominated bonds issued by Indian entities in foreign markets to raise money in Indian currency, with interest and principal repayments in dollar terms. The investor, not the issuer, bears the currency risk.
- Convertible Bonds: Bonds that can be converted into a predetermined number of shares of common stock at a specified time or at the option of the bondholder. Offer potential for capital appreciation.
- Non-Convertible Debentures (NCDs): Debentures that cannot be converted into the equity of the issuing company.
- Inflation Indexed Bonds (IIBs): Government bonds indexed to inflation. The principal and interest payments are adjusted based on inflation rate, protecting investors against inflation.
- Bond Yield: The return on investment that an investor receives from holding a bond. The annual interest payment is divided by the bond's current market price.
Market Infrastructure & Trading
- Demat Account: A dematerialised account that holds securities in electronic form. Eliminates the need for physical certificates and provides a convenient way to buy, sell, and transfer securities.
- NDS-OM (Negotiated Dealing System-Order Matching): An electronic platform used by the RBI for trading government securities. Allows market participants to place bids and offers for government securities and matches them automatically.
- ASBA (Applications Supported by Blocked Amount): A system where the funds of IPO applicants are blocked in their respective accounts. The money is released to the Company only after the allotment.
- T+1 Settlement Cycle: Any trade-related settlements must be completed within one day from the day of the transaction.
- High Frequency Trading (HFT): A trading method that uses powerful computer programs to transact a large number of orders in fractions of a second.
- Algo Trading: Computer-assisted buying and selling of stocks where pre-programmed computer strategies execute trades depending on set instructions or market patterns and conditions.
- Dabba Trading: Informal trading that takes place outside the purview of stock exchanges. Traders bet on stock price movements without incurring a real transaction. Recognised as an offence under Securities Contracts (Regulation) Act (SCRA), 1956.
Investment Vehicles & Fund Structures
- SPAC (Special Purpose Acquisition Company): A company that does not produce goods or services and is sometimes called a shell or blank check company.
- IPO (Initial Public Offering): The process of issuing shares of a private firm to the public in a new stock issuance. It is the selling of securities to the public in the primary market.
- Follow-on Public Offer (FPO): A type of public offering in which a company already listed on the stock exchange issues new shares of its stock to the public.
- Greenshoe Option: A provision in an IPO underwriting agreement that grants the underwriter the right to sell more shares than originally planned if demand is higher than expected. Also called an over-allotment option.
- Offer for Sale (OFS): A mechanism enabling existing shareholders of a listed company, typically promoters, to sell or dilute their holdings through an exchange-based bidding platform.
- Rights Issue: An invitation to existing shareholders to purchase additional new shares in the company. Gives existing shareholders securities called rights.
- Mutual Funds: Investment vehicles consisting of a portfolio of stocks, bonds, or other securities, which collect investors' money and invest it on their behalf. Give small or individual investors access to diversified, professionally managed portfolios.
- Exchange Traded Fund (ETF): A basket of securities that trades on an exchange like a stock. Holds assets such as stocks, commodities, or bonds and generally operates with an arbitrage mechanism.
- Hedge Fund: A limited partnership of private investors whose money is managed by professional fund managers who use a wide range of strategies to earn above-average investment returns.
- Infrastructure Investment Trusts (InvITs): Like a mutual fund, enables direct investment of small amounts of money from individual/institutional investors in infrastructure to earn a small portion of the income as a return.
- Alternative Investment Fund (AIF): Any privately pooled investment fund (from Indian or foreign sources) in the form of a trust, company, body or Limited Liability Partnership (LLP).
Derivatives & Options
- Derivatives: Financial instruments or contracts between two parties which derive their value from an underlying asset. Most common types include futures, options, forwards, and swaps.
- Commodity Derivatives: Financial instruments linked to the price movements of underlying commodities, such as oil, gold, wheat, or natural gas.
- Call Option: An options contract that gives the call option buyer the right, but not the obligation, to buy a stock or other financial instrument at a specific price (strike price) within a specified time frame.
- Put Option: An options contract that gives the buyer the right, but not the obligation, to sell the underlying security at a specified price and at a predetermined date.
Capital & Regulatory Concepts
- Paid-up Capital: The amount of money a company raises when it sells its shares to the shareholders and investors directly through the primary market.
- Authorized Capital: The maximum capital which a company can raise in its lifetime. Also called Registered Capital or Nominal Capital.
- Insider Trading: A malpractice in which trades of a company's securities are carried out by people with access to non-public information that can be crucial for making investment decisions.
- Short Selling: A trading strategy where investors speculate on a stock's decline. Short sellers bet on, and profit from, a drop in a security's price.
- Front Running: A form of market manipulation where individual brokers or brokerage firms trade stock in and out of undisclosed, unmonitored accounts of relatives or confederates.
- Disgorgement: The legally mandated repayment of ill-gotten gains imposed on wrongdoers by the courts. Funds received through illegal or unethical business transactions are paid back, often with interest and/or penalties.
Miscellaneous Concepts
- Social Stock Exchange (SSE): A segment of the existing Stock Exchange that can help Social Enterprises, such as NPOs or For Profit Enterprises (FPEs), to raise funds from the public through the stock exchange mechanism. Eligible activities include eradicating hunger, poverty, malnutrition, inequality, promoting education, financial inclusion, slum area development etc.
- Side Pocketing: An accounting method that allows mutual funds to segregate the bad assets in a separate portfolio within their debt schemes.
- Systematic Investment Plan (SIP): An investment method wherein a particular sum of money is invested regularly, usually into the same security, which could be a mutual fund or funds.
- Standing Deposit Facility (SDF): Allows the RBI to absorb liquidity (deposit) from banks without giving government securities in return to the banks.
- Ways and Means Advances (WMA): The RBI gives a temporary loan facility to the central and state governments to meet mismatches in the receipts and payments of the governments.
- Windfall Gains: An unexpected gain in income which could be due to winning a lottery, unforeseen inheritance or shortage of supply. Windfall gains are transitory in nature.
- Venture Capital: Investment by wealthy investors in start-up companies.
- Yield to Maturity (YTM): If an investment is held till its maturity date, the rate of return that it will generate. Also known as redemption yield.
- Depository Receipt (DR): A negotiable financial instrument issued by a company in a foreign jurisdiction.
- GDR (Global Depositary Receipt): A negotiable financial instrument that represents shares in a foreign company and trades on local stock exchanges in investors' countries.
- ADR (American Depository Receipt): A certificate issued in the United States in lieu of a foreign security. The original securities are lodged in Bank/Custodian abroad.
- IDR (Indian Depository Receipt): An instrument denominated in Indian Rupees created by a Domestic Depository against the underlying equity of issuing company. Enables foreign companies to raise funds from the Indian Securities Markets.
Key Security Market Terms at a Glance:
- Bonds: Gilt Edged, Masala, Convertible, NCDs, IIBs
- Trading: Demat, NDS-OM, ASBA, T+1, HFT, Algo, Dabba
- Investment Vehicles: SPAC, IPO, FPO, Greenshoe, OFS, Rights Issue, Mutual Funds, ETFs, Hedge Funds, InvITs, AIFs
- Derivatives: Futures, Options (Call/Put), Forwards, Swaps, Commodity Derivatives
- Capital Concepts: Paid-up, Authorized, Insider Trading, Short Selling, Front Running, Disgorgement
- Miscellaneous: SSE, Side Pocketing, SIP, SDF, WMA, Windfall Gains, VC, YTM, DR/GDR/ADR/IDR
- Bonds: Gilt Edged, Masala, Convertible, NCDs, IIBs
- Trading: Demat, NDS-OM, ASBA, T+1, HFT, Algo, Dabba
- Investment Vehicles: SPAC, IPO, FPO, Greenshoe, OFS, Rights Issue, Mutual Funds, ETFs, Hedge Funds, InvITs, AIFs
- Derivatives: Futures, Options (Call/Put), Forwards, Swaps, Commodity Derivatives
- Capital Concepts: Paid-up, Authorized, Insider Trading, Short Selling, Front Running, Disgorgement
- Miscellaneous: SSE, Side Pocketing, SIP, SDF, WMA, Windfall Gains, VC, YTM, DR/GDR/ADR/IDR
3. Summary: Key Security Market Terminologies
| Term | Key Definition / Category |
|---|---|
| Intangible Asset | Non-physical assets like patents, brands, copyrights |
| Beta | Measures stock fluctuations relative to the market |
| Arbitrage | Simultaneous buying and selling across platforms for profit |
| Basis Risk | Systematic risk when perfect hedging is not possible |
| Gilt Edged Security | Highest quality government securities (risk-free) |
| Masala Bond | Rupee-denominated bond issued in foreign markets |
| Convertible Bonds | Bonds convertible into shares (UPSC 2022) |
| Non-Convertible Debentures | Cannot be converted into equity (UPSC 2022) |
| Inflation Indexed Bonds | Principal and interest adjusted for inflation (UPSC 2022) |
| Bond Yield | Annual interest divided by current market price (UPSC 2021) |
| Demat Account | Electronic account for holding securities (UPSC 2021) |
| NDS-OM | RBI's electronic platform for G-Sec trading (UPSC 2021) |
| SPAC | Special Purpose Acquisition Company (shell company) |
| IPO | First sale of shares to the public (primary market) |
| Greenshoe Option | Over-allotment option in IPO underwriting |
| Mutual Fund | Diversified, professionally managed investment portfolio |
| ETF | Exchange Traded Fund — trades like a stock |
| Hedge Fund | Limited partnership using diverse strategies for high returns |
| InvIT | Infrastructure Investment Trust — direct investment in infrastructure |
| AIF | Alternative Investment Fund — Category I, II, III |
| Derivatives | Contracts deriving value from underlying asset |
| Call Option | Right to buy at strike price (no obligation) |
| Put Option | Right to sell at strike price (no obligation) |
| Insider Trading | Trading using non-public information (malpractice) |
| Short Selling | Betting on decline in stock price |
| T+1 Settlement | Settlement completed within one day of transaction |
| Social Stock Exchange | Segment for social enterprises to raise funds |
Key Takeaways for UPSC
- Bonds: Gilt Edged (risk-free), Masala (rupee-denominated, investor bears currency risk), Convertible (can become shares), NCDs (cannot convert), IIBs (inflation-protected)
- Market Infrastructure: Demat Account, NDS-OM, ASBA, T+1 Settlement, HFT, Algo Trading, Dabba Trading (illegal under SCRA 1956)
- Investment Vehicles: SPAC, IPO, FPO, Greenshoe, OFS, Rights Issue, Mutual Funds, ETFs, Hedge Funds, InvITs, AIFs (Category I, II, III)
- Derivatives: Futures, Options (Call/Put), Forwards, Swaps, Commodity Derivatives
- Regulatory & Capital: Paid-up Capital, Authorized Capital, Insider Trading, Short Selling, Front Running, Disgorgement
- Miscellaneous: Side Pocketing, SIP, SDF, WMA, Windfall Gains, Venture Capital, YTM, DR/GDR/ADR/IDR
- Social Impact: Social Stock Exchange for NPOs/FPEs to raise funds for social causes
High-Yield Interactive UPSC Quiz (Chapter 7: Security Market in India)
Q1. An intangible asset is best defined as:
Correct Answer: C. An intangible asset is an asset that is not physical in nature, such as a patent, brand, trademark, or copyright. (UPSC 2023)
Q2. Beta measures:
Correct Answer: B. Beta is a numeric value that measures the fluctuations of a stock to changes in the overall stock market. (UPSC 2023)
Q3. Arbitrage refers to:
Correct Answer: C. Arbitrage is the process of simultaneous buying and selling of an asset from different platforms, exchanges or locations to cash in on the price difference. (UPSC 2023)
Q4. Non-Convertible Debentures (NCDs) are:
Correct Answer: B. Non-convertible debentures (NCDs) are those that cannot be converted into the equity of the issuing company. (UPSC 2022)
Q5. Inflation Indexed Bonds (IIBs) are issued by:
Correct Answer: C. Inflation Indexed Bonds are bonds issued by the government indexed to inflation. The principal amount and interest payments are adjusted based on the inflation rate. (UPSC 2022)
Q6. Bond yield is calculated by:
Correct Answer: B. Bond yield is the return on investment from holding a bond. The annual interest payment is divided by the bond's current market price. (UPSC 2021)
Q7. NDS-OM is an electronic platform used by:
Correct Answer: C. NDS-OM (Negotiated Dealing System-Order Matching) is an electronic platform used by the RBI for trading government securities. (UPSC 2021)
Q8. Masala Bonds are denominated in:
Correct Answer: C. Masala Bonds are rupee-denominated bonds issued by Indian entities in foreign markets. The investor, not the issuer, bears the currency risk.
Q9. T+1 Settlement Cycle means:
Correct Answer: C. T+1 settlement cycle means any trade-related settlements must be completed within one day from the day of the transaction.
Q10. ASBA system in IPOs blocks funds:
Correct Answer: B. ASBA (Applications Supported by Blocked Amount) is a system where the funds of IPO applicants are blocked in their respective accounts. The money is released to the Company only after the allotment.