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Qualification - OTHM Level 6 Diploma in Accounting and Business
Unit Name - Financial Securities Markets
Unit Level - Level 6
Unit code - Y/617/4377
Unit Credit - 20
Assignment Title - Financial Securities Markets
Learning outcome 1: Understand different types and trading of securities.
Answer: Securities are tradable financial instruments that represent either an ownership stake in a company (equity), a loan made to an entity (debt), or a right to ownership/future income derived from an underlying asset (derivatives). Equity securities, primarily stocks, signify ownership in a company, offering potential for capital appreciation and dividends, along with voting rights. They are typically traded on organized stock exchanges like the National Stock Exchange (NSE) or Bombay Stock Exchange (BSE) in India, or the NYSE and NASDAQ globally, where buyers and sellers place orders facilitated by brokers. Debt securities, such as bonds, debentures, and commercial paper, represent borrowed money that must be repaid with interest by a specified maturity date. These are generally considered lower-risk investments providing fixed income and are traded in both primary markets (where they are first issued) and secondary markets, including over-the-counter (OTC) markets for less liquid instruments. Derivative securities like futures, options, and swaps derive their value from an underlying asset (e.g., stocks, commodities, currencies) and are used for hedging risk or speculation. They can be traded on exchanges or OTC. Lastly, hybrid securities combine features of both debt and equity, such as convertible bonds or preferred stock, offering a blend of fixed returns and potential for capital appreciation, and are traded in similar ways to other securities depending on their specific characteristics. The trading of all these securities is governed by regulatory bodies like SEBI in India and the SEC in the U.S. to ensure transparency and protect investors.
Learning outcome 2: Understand principles of investment theory, securities and market analysis.
Answer: Investment theory provides the foundational framework for understanding how individuals and institutions make decisions about allocating resources in financial markets, aiming to optimize returns while managing risk. Key principles include the risk-return tradeoff, which posits that higher potential returns typically come with higher risk, and diversification, the strategy of spreading investments across various asset classes to reduce overall portfolio risk. The Efficient Market Hypothesis (EMH) is another core concept, suggesting that asset prices reflect all available information, making it difficult to consistently "beat the market" through active trading, especially in its semi-strong or strong forms. Building upon these principles, securities and market analysis involves various methodologies to evaluate investment opportunities. Fundamental analysis focuses on a company's intrinsic value by examining its financial statements, management quality, industry outlook, and macroeconomic factors to determine if a security is undervalued or overvalued. In contrast, technical analysis studies historical price movements and trading volumes, using charts and indicators to identify patterns and predict future price trends, often employed by short-term traders. Sentiment analysis also plays a role, gauging the overall mood and opinions of market participants, as collective investor psychology can influence prices. By combining these analytical approaches with a sound understanding of investment theory, investors strive to construct portfolios that align with their risk tolerance and financial goals, aiming for long-term wealth creation.
Learning outcome 3: Understand the legislation and regulation controlling the financial services industry.
Answer: The financial services industry operates under a complex web of legislation and regulation designed to ensure stability, protect consumers and investors, prevent illicit activities, and maintain market integrity. In India, key regulatory bodies play specialized roles. The Reserve Bank of India (RBI) acts as the central bank, responsible for monetary policy, banking supervision (including commercial banks and non-banking financial companies - NBFCs), currency management, and maintaining overall financial stability. The Securities and Exchange Board of India (SEBI) is the primary regulator for the securities and commodity markets, protecting investor interests, developing the market, and preventing fraudulent and unfair trade practices through its quasi-legislative, quasi-executive, and quasi-judicial powers. The Insurance Regulatory and Development Authority of India (IRDAI) oversees the insurance sector, focusing on policyholder protection, product approval, financial solvency of insurers, and market development. Similarly, the Pension Fund Regulatory and Development Authority (PFRDA) regulates and promotes the pension sector, specifically the National Pension System (NPS), safeguarding the interests of subscribers. Beyond these, various acts like the Banking Regulation Act, 1949, the Negotiable Instruments Act, 1881, the Foreign Exchange Management Act, 1999, and the Prevention of Money Laundering Act, 2002, provide the legal framework for specific financial activities and combat financial crimes. These regulations collectively aim to foster transparency, fairness, and confidence in the financial system, adapting to evolving market dynamics and addressing emerging risks.
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Aim: The aim of this unit is to develop learners' understanding of investment theories, securities and market analysis. The learners will gain an understanding of the key legislation and regulation affecting the financial services industry.
LO1
Types of securities: bonds; equities; securities.
Bond types and characteristics: pricing bonds; bond yields; term structure of interest rates; theories of term structure; bond risk (types and measurement).
Equities types and characteristics: measures of equity performance; equity pricing; risk; equity evaluation.
Securities types and characteristics; synthetic securities; swaps; bundled and unbundled securities.
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LO2
Investment theory: motives for investment; risk & return; main theories (Accelerator Theory, Internal Funds Theory, Neoclassical Theory).
Valuation of shares: purpose of valuations; information requirements; valuation models (net book value, net realisable value, net replacement cost, price/earnings ratio, earnings yield, dividend valuation, dividend growth, discounted cash flow).
Valuation of debt and financial assets: redeemable debt, irredeemable debt, preference shares, convertible debt; applying valuation models to debt and financial assets.
Use of securities: money market investments; markets & investors; securities quoted on a yield basis; securities quoted on a discount basis.
Concepts of market analysis and market efficiency: Efficient Market Hypothesis; weak, semi- strong and strong form efficiency; practical considerations; investor speculation; investor decision-making.
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LO3
Need for legislation and regulation: to maintain market confidence; to ensure stability of financial system; to protect consumers.
Main features: supervision of stock exchanges; supervision of listed companies; supervision of investment management; supervision of banks and financial service providers; relevant authorities; mechanisms of control (legislation, regulation, voluntary codes); main characteristics of control mechanisms.
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Learning Outcomes- The learner will:
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Assessment Criteria- The learner can:
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1. Understand different types and trading of securities.
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Explain types of securities and associated concepts.
Analyse key characteristics of each type of security.
Assess the impact of regulations and procedures used in trading securities.
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2. Understand principles of investment theory, securities and market analysis.
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Explain the principles of investment theory.
Analyse the valuation of shares, debts and other financial assets.
Assess the use of securities.
Critically review the underlying concepts of market analysis and efficiency.
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3. Understand the legislation and regulation controlling the financial services industry.
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Explain the need for legislation and regulation to control the financial services industry.
Explain the main features of legislation and regulation to control the financial services industry.
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