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Debentures - Finance Glossary

Debentures

Definition of Debentures

A debenture is a legal certificate that a company issues in exchange for a long-term unsecured loan. A debt instrument like a debenture is issued by companies who want to fund their business without diluting existing shares.

The components of a debenture are as follows:

  • Principal: The loan amount or the money lent by an investor
  • Tenure: The duration of the loan
  • Interest rate: The rate of interest
  • Repayment: Terms and conditions of the amount to be repaid

Debenetures can also be issued by small-size companies who may not be creditworthy enough to secure a loan from traditional lenders. Hence, the unsecured aspect of the loan may help achieve their objective.

Related Terms

Beta Stocks

Beta of stocks measures the risk that the shares carry compared to the broader market. Theoretically, the market is said to have a default Beta of 1. As a result, Beta stocks can be of four types:

  • High Beta Stocks : typically having a Beta value of more than 1, these stocks are known to be high-risk, high-reward investments
  • Low Beta Stocks : typically having a Beta value of less than 1, these stocks are known to be low-risk, low-reward investments
  • Negative Beta Stocks : typically having a Beta value of less than zero, these stocks are known to have an inverse correlation with the market
  • Same as the market : typically having a Beta that’s equal to 1, these stocks are known to share characteristics with the market

Settlement Cycle

The settlement cycle refers to the time taken to complete a trade once it is executed. Equities in India have T+1 days for settlement. This indicates the shares and funds are exchanged only one business day after the trade is executed. A shorter settlement cycle reduces counterparty risk. It also ensures that investors get faster access to their money or securities.

High Volatility Stocks

High volatility stocks are shares that fluctuate based on market conditions, typically more than others. The volatility could be a result of inherent fundamentals or other factors like the industry or domain. Identifying high volatility stocks is possible through indicators like Average True Range and Bollinger Bands.

Pair Trading

Pair Trading is a market-neutral trading strategy that involves taking opposite positions in two highly correlated securities. The aim is to make a profit from the temporary difference in the prices. A trader may purchase the relatively underperforming stock (the 'long' position) and short-sell the relatively outperforming stock (the 'short' position) in the pair. The expectation is that the prices will eventually return to their historical mean relationship (convergence).

IPO

An IPO or Initial Public Offering is the method in which a privately held company becomes a publicly listed company. Existing shareholders must approve the IPO plan before the company can go public. Once shareholders approve, the company will either hire an intermediary or go for a Direct Public Offering, the result of which will be the determination of a price for the new equity shares that will be listed in the primary market.

Forex Futures Trading

Forex futures trading is the buying and selling of exchange-traded futures contracts for currency pairs . A forex futures contract gives the holder the right and the obligation to buy or sell a pair of currencies at a predetermined price and date. The important components of forex futures trading include:

  • Forex pair: the currency you will buy in exchange of the other at the end of the futures contract
  • Lot size: the value of the currency included in the contract
  • Contract price: the price at which the futures contract is trading
  • Spot price: the latest forex rate for the currency pair, different from the contract price
  • Margin: the amount of money you’re required to deposit with your currency trading platform
  • Tick size: the minimum amount by which a forex futures contract can move, which is Rs. 0.0025 in India
  • Expiration date: the preagreed day on which the contract must be excercised or squared off

Forex futures trading in India is possible through three exchanges: NSE, BSE, and MSE. The forex futures contracts are standardized derivatives that can be traded between 9.00 AM to 7.30 PM. Forex futures in India are cash settled, meaning profits or losses are settled in INR while the base currency is not delivered.



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