The BSE aims to become a financial supermarket, meaning it aims to provide the right kind of product to suit investors and issuers so that it meets growing customer demands and challenges of the globalization of financial markets. This can be achieved through product innovation and diversification.
Products been developed:
The words equity, share and stock are often used interchangeably since they mean the same thing. A share is regarded as part ownership of a company, therefore shareholders own the company through the purchase of shares in the company.
When you buy shares and become a part owner, the part ownership of the company entitles you, the shareholder, to vote on company matters in proportion to your share holding. The directors of the company you partially own are employed to manage the day to day running of the business, but as a share holder you wholly own the company. A director can also be a shareholder. Share holders are also entitled to a share of the company profits distributed in the form of dividends. As a share holder you can also have a capital gain on your shares when you sell them at a price higher than at which you bought.
As a shareholder you can earn a lot of money if a company is successful, but you also assume the risk of the company. Therefore, when you assume the risk of company there is a possibility to lose the entire investment of the company is unsuccessful. If the company you bought shares in goes bankrupt and liquidates, as a shareholder, you become the last person to be paid if there any money left in the company coffers; other debtors like banks and bondholders are paid first. The best defence is to diversify your share investment, spread your risk across a range of investment instruments and industry. There are however, different types of shares and each type has different advantages and disadvantages attached to it, the main type is the ordinary shares, which have been described above.
Fixed Income Products/Bonds
Bonds- Government and Corporate
These are debt instruments issued by a company or a financial institution. They are known as government bonds when they are issued by the government and they will be regarded as risk free. Bonds are debt instruments that require the issuer (borrower) to repay the bondholder (the lender/investor) the amount borrowed as well as periodic coupon, interest, over a specified period of time.
The coupon rate is the rate of interest that the issuer pays the bondholder each year or every six months. For example, a five year bond pays interest (coupons) at specific dates during a period of five years and at the end of five years (maturity), it also pays the investor the initial amount paid to purchase the bond (face value). Bonds can have variable rate of interest in which they are commonly known as floating rate notes. Floating rate note are reset periodically according to predefined benchmark rate. When you, as the investor, buy a bond, you are guaranteed the return of your money (the principal) along with the promised interest payment.
These are short term fixed instruments that pays a variable coupon for a specific period of time. These coupon (interest) payments are set usually semi-annually or quarterly. The principal (initial investment) is repaid on maturity.
Exchange Traded Funds (ETFs)
ETFs are index tracking funds or tracker funds secured by a basket of securities that are listed on an exchange, for example by a bank or a fund manager, to allow investors to buy or sell securities consisting of the collective basket of shares or index as a single security. Hence, ETFs are a pre-selected basket of shares that are structured in a way that it trades as a single security.
An ETF is just a traded financial instrument representing ownership in the underlying portfolio of securities. Investors are able to buy and sell ETFs on a stock exchange in the same way they would any other share. The one difference however is that an ETF will normally not afford investors the voting rights that they would have enjoyed if they had invested in the underlying stocks.
They are regarded as multi-purpose investment vehicles which incorporate the benefits of holding a portfolio in one security. ETFs give investors access to a variety of sectors and indices. This is because different shares from wide sectors can be combined to create a single security. They are an efficient way of gaining diversified equity market exposure at low costs while avoiding the costs and risks associated with active investment management. They also provide a simple and effective way to invest in markets worldwide. ETFs generally have lower management fees and operating expenses than actively managed funds.
The disadvantages of ETFs include; decline in the prices of the underlying securities which in turn will affect the price of the ETF, the performance of a specific sector or group of shares on which the ETF is based will affect the ETF. When ETFs are structured on foreign stocks there will bear a foreign exchange risk since the price of the underlying is quoted in foreign exchange. Again, in the event of an ETF’ structured on an index, there may be tracking errors as a result of the fund not exactly replicating the performance of the index.
Asset securitization is the transformation of illiquid assets into an instrument that is issued and can be traded in a stock exchange. Assets that can be transformed in this way include residential mortgages, auto-mobile loans, credit card receivables, leases and utility or telephone payments. The difference between asset securitization and collateralized debt or traditional asset based lending is that in the former financial claims are assigned or completely sold to a third party, and this can be a special purpose company or trust.
The special purpose vehicle (SPV) in turn will issue one or more debt instruments (asset backed securities), whose interest and principal payments are dependent on the cash flows that comes from the underlying assets. Therefore, the main element in asset securitization is the separation of good assets from a company or financial institution, and the use of these assets as backing for quality securities that can appeal to investors.
Securitised products are attractive to investors because they allow exposure to otherwise prohibited asset types and industrial sectors. They also accommodate various risk appetite of investors in one capital structure. When an investor buys securitised products of varying maturity, it allows for long, medium and short term matching returns and this is good for the investor since he is able to construct his portfolio to meet varying time needs.
*Still at the initial stages
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