When it comes to the world of investments, bonds play a pivotal role. But have you ever wondered how bonds are traded after their initial issuance? Welcome to the secondary bond market, where bonds change hands among investors, offering liquidity and investment opportunities. In this article, we dive into the intricacies of the secondary bond market in India, shedding light on its types and helping you differentiate between bonds and debentures.
Understanding the Secondary Bond Market
Unlike stocks that primarily trade on well-known stock exchanges, bonds follow a different path. Most bonds are traded over-the-counter (OTC), and there’s a compelling reason behind this – diversity. Bonds hail from various issuers, each with different bond offerings characterised by maturity, coupon rates, nominal values, and credit ratings. This sheer variety makes listing bonds on exchanges a complex endeavour.
Since bonds aren’t listed on major stock exchanges, investors often rely on their trusted brokers to facilitate the buying and selling of bonds. While this OTC approach offers flexibility, it also brings about certain trade-offs, including less regulation, transparency, and liquidity compared to exchange-traded securities.
Exploring the Secondary Bond Market in India
In the secondary bond market in India, when an investor opts not to hold a bond until maturity, they can sell it to another interested investor in the market. To engage in bond transactions in the secondary market, you typically need a bank account for financial transactions and a DEMAT account for bond deposits.
Types of Secondary Market Bonds
In the Indian secondary bond market, various types of bonds are actively traded. Here’s a glimpse of some of these bond categories:
- PSU Bonds: These bonds are issued by public sector companies where the government’s shareholding is generally above 51%.
- Corporate Bonds: Issued by corporations to raise funds from investors, corporate bonds offer higher yields than government securities.
- Tax-Free Bonds: Interest income generated from these bonds is typically non-taxable, making them attractive to investors.
- Government Securities: When the government needs to finance projects, it involves the public to raise capital through government securities.
- Zero Coupon Bonds: These are sold at discounted rates and do not pay regular interest.
- Convertible Bonds: These types of bonds can be converted into equity based on pre-agreed conditions.
- Sovereign Gold Bonds: These are issued by the Central government, these bonds offer a safe way to invest in digital gold.
- Perpetual Bonds: Entities issue these bonds for investors seeking continuous interest income.
- Green Bonds: These bonds are earmarked to raise funds for climate and environmental projects.
- Covered Bonds: Issued by local governments or their agencies to finance public projects like parks and roads.
- State Development Loans: State governments issue these to meet budget expenses, offering low-risk investments.
- Market-Linked Debenture: These sophisticated debt instruments have pay-offs linked to underlying securities.
How to Buy/Sell Bonds in the Secondary Market
If you’re interested in participating in the secondary bond market in India, here’s a simplified guide:
- Complete your KYC: Ensure your identity and address are verified through PAN and Aadhaar. Verify your DEMAT and bank accounts for smooth transactions.
- Select Your Bond: Use filters to search and filter bonds based on your requirements.
- Make an Investment: Make hassle-free online payments to hit your financial investment target.
How Bonds Differ from Stocks
To grasp the significance of the secondary bond market, let’s first consider how stocks commonly trade. Stocks are relatively straightforward, with two primary types: common stock and preferred stock. The variations are limited. Bonds, on the other hand, exhibit a plethora of qualities, including diverse maturities and yields. This diversity results in a multitude of bond issuers, each offering bonds with unique characteristics. Consequently, trading bonds on stock exchanges has become a formidable challenge.
Commonly Traded Bonds Over-the-Counter
In India, as in many other parts of the world, most corporate bonds, issued by both private and public corporations are primarily traded OTC rather than being listed on exchanges. This is due to the inherent diversity among these bonds. The transactions involving exchange-traded bonds also often route through OTC markets, highlighting their significance.
Corporate bonds serve as a means for firms to raise capital for various financial needs. They tend to attract investors with their comparatively higher yields compared to government-issued bonds. However, these higher returns come with increased risk. The pool of investors in corporate bonds includes pension funds, mutual funds, banks, insurance companies, and individual investors.
Understanding the secondary bond market in India is vital for investors seeking opportunities beyond the primary market. This article has provided insights into the dynamics of the secondary bond market, its various types, and how bonds differ from debentures. Armed with this knowledge, Indian investors can make informed decisions and navigate the complexities of the bond market. Happy investing!
FAQs| Secondary Bond Market in India
The secondary bond market is where already-issued bonds are traded among investors. It adds liquidity and helps bondholders buy/sell bonds before maturity. It also impacts the primary bond market by influencing new bond demand based on existing bond prices and yields.
While both involve trading, stocks are relatively straightforward with limited types, whereas bonds have various characteristics, making them more diverse. Additionally, bond prices are influenced by changing interest rates and credit ratings, making it challenging to list current prices for bond issues on stock markets.
In India, most corporate bonds issued by private and public corporations are actively traded in the secondary bond market. Many exchange-traded bonds also route through OTC markets.
Investing in corporate bonds comes with certain risks, including credit risk, where the issuer may default on bond payments, and call risk, where the issuer redeems the bond before maturity, potentially limiting investment choices for the bondholder.
Disclaimer: Investments in the securities market are subject to market risks; read all the related documents carefully before investing.