Market Security project

1. {

2. OMAIR QASIM
FAIZAN TAHIR
ORANGZAIB
WAJID KHAN
TAIMOOR NASIR
Members

3. PRESENTED TO
SIR AMIR

4. MARKETABLE
SECURITIES
TOPIC

5.  WHAT ARE MARKETABLES SECURTIES
 FEATURES OF MARKETABLE SECURTIES
 TYPES OF RISK ASSOCIATED WITH ANY SECURITIES
 CLASSIFICATION OF MARKETABLE SECURITIES
 TYPES OF MARKETABLE SECURITIES
 WHY INVEST IN MARKETABLE SECURITIES
 METHODS OF MARKETABLE SECURITIES
 CONCLUSION
CONTENTS

6. “Marketable securities are the financial instrument than can be easily bought
and sold on a stock exchange within a short period of time.”
 In order to understand the above definition, we first need to
understand one important term in the above definition – “financial
instruments”.
 Financials instrument represents the legal obligation to pay or receive
any monetary value. Financial instruments are the assets than can be
exchanged or traded.
 All marketable securities are financial instruments but all financial
instruments are not marketable securities.
WHAT ARE MARKETABEL SECURITIES

7. There are many features of Marketable Securities these are discuss
below:
1) Marketable securities are highly liquid
 Marketable securities are highly liquid and can be easily converted
into cash within short time and at a reasonable price.
 What amounts to short time has not be defined anywhere but as per
the conventions and generally accepted principles, this duration
should be less than one year.
 Some of examples of instruments who exhibit the following features
and hence classified as marketable securities are commercial paper,
treasury bills, bills receivables and other short term instruments.
FEATURES OF MARKETABLE SECURTIES

8. 2) MARKETABLE SECURITIES ARE EASILY TRANSFERABLE
 In order to be highly liquid, marketable securities should be easily
transferable.
 Highly liquid and easily transferable features of marketable
securities are complementary to one other.
 Marketable securities are instruments than can be easily
transferable on a stock exchange or otherwise.

9. 3) LOWER RETURN ON MARKETABLE SECURITIES
 Return on any security is directly proportional to risk
associated with it.
 Higher the risk, higher the return.
 Since marketable securities are highly liquid and easily
transferable, inflation* and default risk* associated with them
are very low in comparison to other types of securities.
 Investor has to make a trade-off between risk and return when
choosing marketable securities.

10. FAIZAN TAHIR

11.  Default risk: Default risk is the probability that the issuer or
borrower will not be able to make payments on their debt
obligations on the due date.
 Interest rate risk: Interest rate risk is the risk associated with
the fixed return instrument like bonds, debentures whose
value decrease on account of rise in interest rate.
 Inflation risk: Inflation risk affects all types of securities.
Though it affects every economy, it’s effect is seen more in
high inflationary economy where price level of commodities
rises drastically every year. Rise in price level reduces the
value of money and the decreased value of money results in
decreased return on assets.
TYPES OF RISK ASSOCIATED WITH ANY
SECURITIES

12. Marketable securities can be classified under two categories:
1) MARKETABLE EQUITY SECURITIES
2) MARKETABLE DEBT SECURITIES
CLASSIFICATION OF MARKETABLE
SECURITIES

13.  Marketable equity securities are equity instruments that are trade
on stock exchanges
 Marketable equity security can be both Common Stock and
Preferred Stock
 If the Stock is expected to be liquidated within one year the holding
company will list as a Current Assets
 If the company expects to hold the stock for more than one year it
will listed as a non current Assets
 All marketable equity securities all current and non current are
listed at the lower value of cost or market
1. Marketable equity securities

14.  Marketable debt securities are those debt securities that are traded
in bond market
 Common types of debt securities are Government bonds,
Commercial papers and etc.
 Marketable debt securities are held as short term investments and
are expected to be sold within one year
 If a debt securities is expected to be held for more than one year it
should be classified as a long term investment on the companies
Balance Sheet
2. Marketable debt securities

15. ORANGZAIB

16. There are different types of Marketable Securities. Some of the
common marketable securities available in the market are discussed
here
1) Commercial Paper
 Commercial papers are short term debt instruments with a
maturity of not more than 270 days.
 They are unsecured debt i.e. they are not backed by collateral or, in
other words, borrower does not guarantee payment.
 They are used for short term financing i.e. used for purchase of
inventory, current assets and meeting short term liabilities.
 Since they are not secured, they are issued by large institutions and
are purchased by big and wealthy corporates.
Types of Marketable Securities

17. 2) BILLS OF EXCHANGE
 A banker acceptance is the amount borrowed by the borrower,
promised to be paid in future, which is backed and guaranteed
by the bank.
 Difference between commercial paper and bills of exchange is
that bills of exchange unlike commercial paper is secured debt.
 Like commercial paper, it is also a short term finance instrument
which is generally used for purchased of inventory, current assets
and meeting other short term liabilities.
 Bankers acceptances specifies the amount of money, the due date
and the name of the person to whom payment is to be done.

18. 3) TREASURY BILLS (T BILLS)
 These T-bills are short term securities with maturity of less than one
year.
 In market, one can find different categories of T-bills with three-
month, six-month and one-year maturity.
 One of the feature of T-Bills which makes them popular with
common investors is that they are not issued at large
denominations.
 Like commercial paper, they are issued at a discount and investors
gets a face value on maturity.

19. Government issues a T-Bill Face Value Rs 10,000; maturity six
month at Rs 9,800.
SOLUTION –
 In this case, Investor will have to shelve Rs 9,800 for purchasing
the T-Bill. At the end of six months, Investor can sell back the T-
bill to Government at Rs 10,000. Thus earning himself
 Rs 200, which is a discount rate or the interest rate earned by
holding the T-bill. Hence it is said that the T-bills are always
issued at a discount.
T- BILL EXAMPLE

20. 4) CERTIFICATES OF DEPOSITS
 These are similar to savings accounts.
 It is issued in lieu of the money deposited at a bank for a
specified period.
 These are negotiable instruments and hence can be easily
transferable.
 Maturity period of certificate of deposits varies from seven
days to one year in case of commercial banks, and from one
year to three years, in case of financial institutions

21. WAJID KHAN

22. Almost every Company will invest the certain amount of funds
in marketable securities. Broad reasons for investing in
marketable security as follows -:
1) Substitute for hard cash
 Marketable securities are great substitute for cash and bank
balances
 Idle cash does not grow since no return is received by holding
it.
 Marketable securities not only offer adequate return but also
retains the benefits associated with holding money, since they
are highly liquid and easily transferable.
Why invest in Marketable Securities?

23. 2) Repayment of short term liabilities
 – Every company has liabilities which are further bifurcated into
short term and long term liabilities
 Long term liabilities are repaid over longer time period, which
generally is more than one year. Whereas short term liabilities
are to be paid within one year
 Bonus expense, tax expense and etc. are some of the examples of
the short term liability
 Marketable securities are the best mode of payment of short term
liabilities since they are highly liquid and in the meantime also
provide the company additional income in form of interests and
dividends.

24. 3) Regulatory Requirement
 In order to raise funds and loans from financial institutions,
corporates have to follow certain guidelines and rules known as
covenants which safeguards the interest of lenders
 Covenants are often in form of ratios which the borrower has to
maintain throughout the loan period. These ratios mostly deal
with liquidity and long term solvency health of companies
 Maintenance of marketable securities helps in meeting out
solvency ratios since most of the marketable securities are
considered as current assets

25. (1). Interest and dividend revenue
Marketable securities earn dividend or interest revenue for the
company. If a company holds a large sum of cash and does not invest
it anywhere, it will generate nothing for the company.
(2). Increase in market value:
Marketable securities also generate a return when their market
value increases
Advantages of marketable securities:

26. (3). Liquidity
Unlike long term investments, purchase of marketable
securities does not impact the liquidity position of the business.
They can be quickly sold in the secondary financial markets to
meet immediate cash needs of the company.
Continue…….

27. TAIMOOR NASIR

28. There are many methods of marketing securities some are discuss
below
 Over the counter placement
 Right Issue
 Bonus Share
 Offer for Sale
 …..
Methods of Marketing
Securities

29.  It permits smaller companies to raise funds. A company may place its
issue through OTC Exchange.
 The procedure involved under this method is that the company
wishing to raise funds through OTC Exchange appoints a member of
OTCEI as a sponsor. The sponsor appraises the project and values the
share of the company.
 The sponsor ensures the success of the issue even if it has to subscribe
to all the shares by itself.
Over the Counter Placement

30.  It is an invitation to the existing shareholders to subscribe for
further shares to be issued by a company.
 A right simply means an option to buy certain privileged price
within a certain specific period.
 Section 81 of the Companies Act 1956 has provided a pre emotive to
the existing shareholders of a company to purchase shares in
further issues of the company.
Right Issue

31.  A company having free reserves built out of genuine profits or
share premium collected in cash may issue bonus shares to its
existing shareholders
 The companies which have huge accumulated profits and reserves
but not so good liquidity position prefer to capitalize profits by the
issue of bonus shares.
 Bonus issue does not bring in fresh capital for the company, it only
enables a company to restructure its capital.
Bonus Share

32.  Adopted in case of large issue of companies.
 The issuing company sells or agrees to sell the securities for sale to
certain issue houses or the specialized financial institutions at a
fixed price.
 The issue house or the financial institutions then issue
advertisements making offer for sale of such securities at a price
higher than the price at which they obtain the securities.
Offer for Sale

33.  All the above features and advantages of marketable securities
have made them quite popular means of financial instrument.
 Almost every company holds some amount of marketable
securities. The specific reason for holding these depend greatly on
the solvency and financial condition of the company.
 Despite many advantages, there are some limitations like low
return, default risk and inflation risk associated with marketable
securities.
 Marketable securities are held by the company for trading purpose
or liquidity purpose.
 Generally, these are held up to their maturity period, but company
may sell them prior to their stated maturities for strategic reasons
including, but not limited to, anticipation of credit deterioration and
duration management.
Conclusion