This article throws light upon the top three categories for classification of security buyers. The categories are: 1. Individual Investors 2. Joint-stock Companies 3. Institutional Investors.

Classification of Security Buyers: Category # 1.

Individual Investors:

The savings of the individuals are the ultimate source of investment in corporate securities. According to an estimate the number of individual investors in shares was 4.87 Lakhs in 1959, 10.65 Lakhs in 1965, 20 Lakhs in 1980 and about 100 Lakhs in 1989.


The number of individual investors has been increasing over time. At the end of 1994, it was well above 200 Lakhs. Inspite of increase in number the investors as a percentage of total population have remained negligible in India compared to other countries like U.S.A.; Germany and U.K.

The various individual investors of securities may be classified under three broad categories:

(i) Real Investors

(ii) Speculators, and


(iii) Individuals who are affiliated with the issuing company.

(i) Real Investors:

They are the individuals who have surplus of income or past accumulated wealth and which they wish to invest for making future income. Such investors who are not affiliated with the issuing company either as existing shareholders or as creditors or customers of the company, etc. are termed as real investors.

There are numerous investment opportunities available to such investors, including Government (gilt- edged) and corporate securities.


Individuals prefer to make investment in such securities which provide them:

(i) Better security of investment, i.e. minimum risk;

(ii) Stable returns;

(iii) Liquidity, i.e. easy marketability;


(iv) Capital appreciation and growth;

(v) Lesser tax burden;

(vi) Favourable denomination and period of maturity, and

(vii) Pride of ownership or control.


The preferences of individual investors may vary according to their age, income, habits, education, etc. But the prime motive of investing in corporate securities, for all types of investors, is to earn higher income. Debentures and preference shares may be preferred by investors who want to take lesser risk and earn fair, regular and stable returns.

At the same time, the investors who are prepared to take risk for earning higher returns and considerable appreciation in investments would prefer to invest in equity shares.

(ii) Speculative Investors:

There are certain investors who purchase securities with speculative motives. They are not real investors. Their aim is to sell the securities and make capital gains-through wide fluctuations in the value of securities. There are two types of speculators, namely (i) bulls, and (ii) bears. A bull is an operator who expects a rise in prices of securities in future.


In anticipation of price rise he makes purchases of shares and other securities with the intention to sell at higher prices in future. He, being a speculator, has no intention to retain investment in securities.

A bear, on the other hand, expects prices to fall in future and sells securities at present with a view to purchase them at lower prices in future. He tends to force down the prices of securities in order to make gains through price fluctuations.

(iii) Individuals Affiliated with the Issuing Company:

The existing companies usually prefer to sell their fresh issues to its customers, employees, creditors and existing shareholders, etc. This category of individuals investing in securities includes those persons who are affiliated with the issuing company in one way or the other. There are many advantages of selling securities to this category of investors.


A company can successfully attract its customers or dealers to purchase its securities. Public utility companies can easily explore this type of investors. Some companies in the past have also approached with success its customers to invest in the securities of the company.

The major advantages of selling securities to customers include:

(i) Wide distribution of securities;

(ii) Reduced chances of speculations;

(iii) Lesser cost, and easier price fixation, etc.

But selling the securities to customers has certain drawbacks also. It lacks flexibility and the company to maintain satisfactory relations and prestige with its customers has to usually pay a minimum fixed dividend or interest regularly to them.


In the Same manner, a company may be able to sell its securities to its creditors also. They are usually seen as a good prospect for raising capital at the time of reorganisation of a company.

The Government of India in 1985 introduced Employees Stock Option Scheme to encourage employees’ participation in management. As per guidelines issued by the Securities and Exchange Board of India, dated 11.6.1992, Employees Stock Option Scheme is voluntary on the part of the company to encourage employees to have a higher participation in the company.

As per the scheme, reservation should not be more than 5% of the issue to equally distribute among the employees. The issuer may have non-transferability at his discretion in new issues and in other cases; employee’s participation upto 5% (maximum 200 shares) shall be non-transferable for a period of three years.

It has come to the notice of the Government that the offer of shares to the employees, on preferential basis, has been misused by some companies by allotting shares to non- employees. The companies have been advised to ensure that the shares reserved under employees quota be allotted only to the bonafide employees.

This scheme finds success in selling securities to the employees and the company has to incur much lesser costs in marketing securities to them.

Existing companies may also sell securities to its existing stock/bond holders. The Companies Act, 1956 has provided for a pre-emptive right to the existing shareholders of a company.


According to section 81 of the Companies Act, 1956, whenever a public limited company proposes to increase its subscribed capital by the allotment of further issues, after the expiry of two years from the formation of the company or the expiry of one year from the first allotment of shares in the company, such shares must first be offered to holders of equity shares in proportion as nearly as circumstances admit to the capital paid up on these shares.

Such issue of shares is called Rights Issue. The Securities and Exchange Board of India has issued certain guidelines to be followed by the company making rights issues.

However, we may point out that by selling securities to the existing shareholders a company is benefited by way of reduced costs of marketing the securities as well as the certainty of success in the sale of securities.

Category # 2. Joint-stock Companies:

After individuals, the joint-stock companies are the next important group of investors in the corporate securities. According to a recent study of the Industrial Development Bank of India (IDBI) the share of joint- stock companies in the total paid up capital of the private sector was 31 per cent.

But their share in the investor’s world has been declining over the years. The ownership of securities by joint-stock companies is in a way indirect rather than direct ownership of securities by individuals.

Category # 3. Institutional Investors:

The institutional investors have emerged as the most important group of investors in corporate securities.


The various institutional investors may be further classified into three categories:

(i) Private institutional investors;

(ii) Public financial institutions; and

(iii) Foreign institutional investors.

Private institutional investors include on the one hand institutions, such as Life Insurance Companies (LICs), Investment Trusts, U.T.I., Commercial Banks, PPFs, etc., which invest their own funds ; and on the other those which invest on behalf of their clients or their own funds for short-term. The second type of private institutional investors includes Underwriters, Issue Houses, Investment Bankers and Trustee Companies.

The public institutions represent various Government agencies engaged in promotion and financing of business enterprises. These include IDBI, NIDC, IFCI, ICICI, SIDCs, SIICs, etc.


It is the financial institutions which have emerged as the most important group of investors in corporate securities in the recent years. A recent study of IDBI has shown that the share of financial institutions in the total paid up capital of the private sector was to the tune of 27.3 per cent.

The liberalisation policy of the new Government has increased the scope and importance of institutional investors in the Indian corporate sector.

With the opening up of the economy, foreign institutional investars (FIIs) have also joined the band of investors. In fact, they are becoming the major players in the securities market. In the process, the securities markets are being institutionalised.

In the new universe of investors, as shown on the next page, the real or retail investors shall still be the centre of the institutionalised market. But theory will be forced to channelise their investments through institutions and mutual funds who will take their portfolio decisions.

With the huge sums of money and research, the foreign institutional investors (FIIs), the mutual funds, the public provident funds, the financial institutions, merchant bankers, underwriters, credit raters, etc., will play a major role in the investor’s world and the securities markets.

Above all SEBI will control the entire new universe of investors keeping a vigilant eye on the players, providing investor protection and promoting orderly and healthy growth of the securities market.