SECONDARY MARKET

What is it?

Secondary market is platform wherein the share of listing companies are traded, amongst
investors.

*Investors can purchase and sale share without the intervention of the companies. Also, the
income in this market is generated by sale of the shares.

Some of the entities that are functional in a secondary market include –

 Retail investors- also known as an individual investor.

 Advisory service providers and brokers comprising commission brokers and security
dealers, among others.
 Financial intermediaries including non-banking financial companies, insurance
companies, banks and mutual funds.
In secondary markets not always shares are traded, there are different instruments like fixed
income instruments, variable income instruments and hybrid instruments.

1. Fixed Income Instruments

They are primarily debt instruments ensuring a regular form of payment such as interests, and the

principal is repaid on the date of maturity. Example for fixed income instruments are Debenture,

Bonds and, Preference shares.

2. Variable Income Instruments

The income in generated by rate of return to the investors, and various market forces

determine the ROR. Example for variable income instruments are equity shares and

derivatives.

Equity shares are instruments that allow a company to raise finance. Also, investors

holding equity shares have a claim over net profits of a company along with its assets if it

goes into liquidation.

As for derivatives, they are a contractual obligation between two different parties

involving pay-off for stipulated performance.

3. Hybrid Instruments
 When two or more instruments of different kind are used, they are known as hybrid

instruments. Example of hybrid instruments are convertible debentures- they are available

as loan and debt security, and also can be converted in equity shares after a period.

Functions of Secondary Market

 It’s a continuous market for securities,-You can trade shares without risk and enjoy

continuous opportunities for trading.

 You can evaluate securities: The prices of shares give a clear idea on the

performance of Companies.

 You can mobilize savings:- Public savings are mobilized through mutual funds,

REITs among others. Ordinary citizens get an opportunity to invest small amounts

in mutual funds.

 Stock markets encourage healthy speculation: Stock markets offer opportunities

for healthy speculation and the chance to reap high profits in the markets.

 Easy movement of funds: Stock exchanges like BSE and NSE help investors and

Companies sell/buy shares.

 BSE and NSE protect investors: SEBI regulates stock exchanges and protects the

interests of investors.

 Secondary market offers liquidity: Banks invest idle money in the secondary

market and earn quick profits in a short time.

 Secondary markets are an economic barometer:-You can get an idea of the

economic condition of the nation on the basis of stock market

 Secondary market regulates companies: The companies are forced to follow set of

rules and regulations by the stock markets.

 Stock Market attracts foreign investments: As attracting foreign capital into India

Foreign Institutional Investments and Foreign Portfolio Investments increase and

offer high returns, Also, the stock market helps to strength the Indian currency.
Advantages of Secondary Market
 It mobilizes savings: It encourages investors to invest money in the form of shares.
Secondary markets provide a platform for easy trading in shares, which helps convert
shares to cash.
 Great investment opportunities for shareholders: Shareholders enjoy a great opportunity
to save and invest. There is capital appreciation as share value increases, also an
opportunity to get dividends on shares.
 You get investment advice: There are stockbrokers and investment advisers who offer
investment advice in secondary markets. They advise on how to buy/sell shares and you
don't need to be an expert on stocks.
 Better Corporate Governance: While managers are custodians of the Company,
shareholders are the owners. The manager is accountable to the shareholders of the
Company. Management of listed Companies is always better than the unlisted, as
shareholders keep a close eye on the management of the Company.

Disadvantages of Secondary Market

 Secondary markets are volatile: Investments in stocks are risky. Shares go up and down
many times a day. You could earn high returns or lose a lot of money.
 Brokerage and Commissions: When you buy/sell shares, brokers earn commissions,
eating up profits.
 Time consuming: The process of investing in secondary markets may be time consuming.

What is listing in Stock Exchange?

Listing is the process of registering a company in the stock exchange. It has been made
compulsory by the SEBI (Securities & Exchange Board of India) that a company which is
intending to offer shares/securities through the prospectus must be listed in the stock exchange.
A company can be listed in one or more stock exchanges but once the company is listed it has to
follow all the rules and regulations by the stock exchange. The company has to provide all the
information that the stock exchange asks for during the procedure of listing.

• Certified copies of Memorandum & Articles of Association

• Underwriting Agreements
• Particulars of the shares & debentures which are to be issued and their specimen copies
• Copies of balance sheets & audited accounts of the last 5 years
• Particulars of the dividends and interest paid in the previous years, regarding the capital
structure & brief history of the company, etc
The above are just some of the documents apart from these there are other documents and criteria
and obligations which are to be met by the company.

Advantages of Listing a Company in Stock Exchange

 The investors have faith is the company is listed.
 When the company is listed its name is always in the news as and when there is
discussion about the stock market hence it gains free publicity or it gets marketed.
 If the company is listed then it becomes easy for it to borrow from financial institutions.
 On the basis of the value of its securities in the market it can lure many investors.
 The listing of a company becomes an advantage for the existing investors as the company
has to follow the rules and regulations which have been framed to protect the interest of
the investors.

Disadvantages of Listing
 The true picture of the performance company cannot be decided lonely on the basis of
the value of the securities in the stock market.
 In the process of getting listed in stock market the company is forced to disclose the
information which can be easily accessed by the competitors.
In the secondary market even an individual person can trade but for an individual to trade in the
market either he must be a broker or else the individual must hire a broker. In the stock
exchanges only the brokers are allowed to enter and to do the trading.
Broker
Who is a broker?
A broker is a person who trades in the stock exchange, on behalf of his clientele or himself. The
broker is the person who have the right knowledge and information of the market. To be an
broker, one must pass the written test and interview conducted by the SEBI. Minimum criteria is
no criminal records, and 12th pass out.
Types of Brokers
1. Commission broker- Represents the client, and charge them commission on every trade
they make on their behalf.
2. Jobbers-independent brokers, Purchases the securities and sells them at a higher price, to
maintain profit.
3. Authorized Clerks- Assistants of Stock Broker. Assistants carry out the trading on behalf
of the stock broker, as per the rules only a limited number of brokers can be appointed,
ant the stock broker is responsible for every transaction.
4. Sub Broker- Sub brokers are agents for the brokers, they are not part of the stock
exchange, but are subjected to all the rules and regulations. The sub-broker get clients to
the brokers. Known as “Remisiers” in BSE
Trading Process of Stock Exchange

Step 1: First step is that the investors who are interested in investing in the stock market choose a
broker or a brokerage firm who can represent them in the stock market.

Step 2: The clients place the order with their broker. In this world of technology the orders are
usually placed over the phone calls. The clients call up their brokers and tell him to purchase or
sell the shares based on their interest or some of the clients ask the suggestion from the broker
and if convinced go ahead with that.

Step 3: The broker based on the orders of the clients approaches the jobbers and fixes the price.

Step 4: Once the transaction has been the details are taken down in a small rough book.

Step 5: Once the transaction has taken place the broker /authorized clerk prepares a contract note
it is a written agreement which contains all the details regarding the selling/buying of the shares
and the brokerage that is charged. This agreement is sent to the client also.

Step 6: Finally the shares are delivered to the client along with the transfer deed which is duly
signed by the transferor as it has been a rule to have a Demat account so, now the shares are
directly transferred to the account and there is no need of signing the transfer deed.

NSE (NATIONAL STOCK EXCHANGE)

The National Stock Exchange is the latest, most modern and technology driven exchange. It was
incorporated in 1992 and was recognized as a stock exchange in April 1993. It started operations
in 1994. The NSE was set up by leading financial institutions, banks, insurance companies and
other financial intermediaries. It is managed by professionals, who do not directly or indirectly
trade on the exchange. The trading rights are with the trading members who offer their services
to the investors.
OBJECTIVES OF NSE
NSE was set up with the following objectives:
 Establishing a nationwide trading facility for all types of securities.
 Ensuring equal access to investors all over the country through an appropriate
communication network.
 Providing a fair, efficient and transparent securities market using electronic trading
system.
 Enabling shorter settlement cycles and book entry settlements.
 Meeting international benchmarks and standards.
BSE (BOMBAY STOCK EXCHANGE)
BSE Ltd (formerly known as Bombay Stock Exchange Ltd) was established in 1875 and was
Asia’s first Stock Exchange. It was granted permanent recognition under the Securities Contract
(Regulation) Act, 1956. It has contributed to the growth of the corporate sector by providing a
platform for raising capital. It is known as BSE Ltd but was established as the Native Share
Stock Brokers Association.
OBJECTIVES OF BSE
 To provide an efficient and transparent market for trading in equity, debt instruments,
derivatives, and mutual funds.
 To provide a trading platform for equities of small and medium enterprises.
 To ensure active trading and safeguard market integrity through an electronically-driven
exchange.
 To provide other services to capital market participants, like risk management, clearing,
settlement, market data, and education.
 To conform to international standards.

OVER THE COUNTER EXCHANGE OF INDIA (OTCEI)

The OTCEI is a company incorporated under the Companies Act 1956. It was set-up to provide
small and medium companies an access to the capital market for raising finance in a cost
effective manner. It was also meant to provide investors with a convenient transparent and
efficient avenue for capital market investment.
It has been promoted by UTI, ICICI, IDBI, IFCI, LIC, GIC, SBI Capital markets and Can Bank
Financial Services.
There is no particular market place in the geographical sense. The objectives of OTCEI are to
provide quicker liquidity to securities at a fixed and fair price, liquidity for less traded securities
or that of small companies, a simplified process of buying and selling and easy and cheaper
means of making public sale of new issues. However, the OTCEI has now been withdrawn.
INTERNET TRADING
The Securities & Exchange Board of India (SEBI) approved the report on Internet Trading
brought out by the SEBI Committee on Internet Based Trading and Services In January 2000.
Internet trading can take place through order routing systems, which will route client orders to
exchange trading systems for execution. Thus a client sitting in any part of the country would be
able to trade using the Internet as a medium through brokers' Internet trading systems.

SEBI-registered brokers can introduce Internet based trading after obtaining permission from
respective Stock Exchanges. SEBI has stipulated the minimum conditions to be fulfilled by
trading members to start Internet based trading and services.