UNIT II SECURITIESMARKETS

Financial Market - Segments – Types - - Participants in financial ffloating new issues, Book
building–Role of primary market–regulation of primary market, Stock exchanges in India –
BSE, OTCEI , NSE, ISE, and Regulations of stock exchanges –Trading system in stock
exchanges–SEBI.

Financial Market
A financial market is a market in which people trade financial securities and derivatives at low transaction
costs. Some of the securities include stocks and bonds raw materials and precious metals which are
known as commodities in the financial markets.
Segments of financial markets:
Key segments are the most critical parts of the financial market. They include primary and secondary
markets.

 Primary Market:
It is where new securities get sold to investors for the first time. This is also known as an initial public
offering (IPO), which occurs when a firm sells shares to the public.
This type of investment helps to improve a company's value, allowing an investor to achieve exceptional
returns through a trade sale, buyout, recapitalization, or IPO.
Individual investors have generally had limited access to these possibilities. Previously, one had to fulfill
the standards of an accredited investor before taking on the risk of investing in private markets.

 Secondary Market

The secondary market is where the securities get traded after they are issued. The security's issuer or
another party (such as a broker or dealer) sells it to an investor who buys it to resell it at a higher price
later. Investors can also buy and hold stocks directly from issuers, known as "buying on margin."
The securities traded on exchanges are listed securities because their prices are published publicly; thus,
anyone can find out who owns them and how much each owns them at any given time.
This information makes it easy for investors to decide whether they want to buy into certain stocks before
making an investment decision themselves!
Types of financial market:
 Over the Counter (OTC) Market – They manage public stock exchange, which is not listed on the
NASDAQ, American Stock Exchange, and New York Stock Exchange. The OTC market dealing with
companies are usually small companies that can be traded in cheap and has less regulation.
 Bond Market – A financial market is a place where investors loan money on bond as security for a set if
time at a predefined rate of interest. Bonds are issued by corporations, states, municipalities, and federal
governments across the world.
  Money Markets – They trade high liquid and short maturities, and lending of securities that matures in
less than a year.
 Derivatives Market –They trades securities that determine its value from its primary asset. The
derivative contract value is regulated by the market price of the primary item — the derivatives market
securities, including futures, options, contracts-for-difference, forward contracts, and swaps.
 Forex Market – It is a financial market where investors trade in currencies. In the entire world, this is the
most liquid financial market.
Participants in financial market:
The five main participants of the stock market include SEBI, which is
The Regulator
The stock Exchanges
Publicly listed companies,
Investors and traders and
Intermediaries.
The Indian Stock market is governed by the Securities and Exchange Board of India.
Primary Market:
In the primary market investors are able to purchase securities directly from the issuer. Types of primary
market issues include an initial public offer (IPO), a private placement, a rights issue, and a preferred
allotment.

Methods of floating new issue:

It is the method of making shares available to public investors. It is when a company decides to go public
for its shares. So much so that the public investors can invest in the same. The shares are open for issuing
and selling. The floatation of a company gives it a firm grip in the primary and secondary market. It can
raise more money for its company and aim towards more development. It aids in the expansion of the
business and makes more room for research and development in the primary market
1.PUBLIC ISSUE
a. I P O –Initial Public Offer
b. Further Public Issue (FPO)
method 1: Public Issue This method allows anyone belonging to any part of India to subscribe for the securities
or invest in the particular company’s stocks. When an offer is made by the company so that more and
more people become a part of the shareholder’s family, it is known as a public issue.
Public Issue is further divided into:
Initial Public Offer (IPO)
Initial Public Offer or IPO, only a certain amount of the securities that the company has fixed
is made public. The specific securities are available for subscription to the public for the very first time.
The Initial Public Offering had many methods making it public, including fixed price method, book
building method, or an amalgamation of both.
Further Public Offer (FPO)
It also goes by the name, Seasoned or Subsequent Public Offer. Through this, an Indian company makes a
fresh set of securities available to the public for subscription. It is also termed as “Follow On Public
Offer”.
Method 2: Private Placement
private placement is the method of placing the shares from an Indian company to a selected number of
people. The number of people should not exceed 50 or as prescribed in any case. When the issuing of the
shares by the issuer is not a public issue nor a rights issue, it is termed as a private placement in the
primary market. Since the issuing of the shares is private and limited, mainly brokers buy these securities
and further sell them to their clients. The brokers are wholesalers of the stocks here. The promoters can
sell a portion of the securities to their family members, friends, or well-wishers. However, the promoters
have to make a minimum contribution before the issue is made public. Mutual funds, financial
institutions, and other such organisations subscribe to private placement orders.

The private placement in the primary and secondary market can be of two kinds:
Preferential Issue/Allotment
Preferential Issue deals with issuing securities to a selected or specific group of people. It is done on a
private placement basis. The issue price should be higher than the average high or low of the closing
price.
Qualified Institutions Placement (QIP)
As the name suggests, the Qualified Institutions Placement is only made to the renowned institutions in
the financial sector. The shares can be converted to equity.
Method 3: Rights Issue
The shares that are being offered to the existing shareholders of any company are termed as a rights issue
in the primary market. However, the shares are offered in a particular proportion and not haphazardly.
This is an effective way of fundraising for successful companies. The amount of funds needed by the
company decides the proportion of the securities to be sold to the shareholders.
Method 4: Bonus Reserves
Through bonus reserves, the securities are distributed to the existing shareholders by the free reserves
present in the company. It is served as a bonus to the shareholders, and they do not have to pay any extra
amount for these shares. The various Indian companies are interested in this method as it brings up the
value of shares.
Method 5: Employees Stock Option Plan (ESOP)
As the name suggests, through this method, the employees of a company can have a share of the
securities. Many ways and means are specified for the employees to receive the company’s stocks in the
primary market. The Employee Stock Option Plan is provided to the employees at a higher position,
including the director, chairman, manager, and so on. The stocks are made available to them at a
predetermined price and the date for the purchase is also specified. The ESOP is provided to the
employees so that they can avail this service. The employees can buy the stocks directly, or they can
receive them as a bonus. The last option is the Employees Stock Option Plan or ESOP.

Book building:
Book building is the process of price discovery requires the underwriter to call forth bids from various
institutional investors such as fund managers and others

Book building process:

 The issuing company hires an investment bank to act as an underwriter who decides the price range of the
security.
 The investment bank then, invites large scale buyers, fund managers and others, to submit bids on the
shares.
 The book is then built through the listing and evaluation of the aggregated demands for the issue from the
submitted bids. The final price of the security is termed as the cut-off price.
 The underwriter publicises the details of the bids in order to maintain transparency in the entire process.
 Shares are allocated to the accepted bidders, thereafter.
 The prices determined in the book building process does not suggest that the price is the best price, nor is
it mandatory for the company to use the said price in an IPO.

Role of Primary Market:

The New Issue Market has three functions to perform. These may put together and referred to as the
‘performing’ role of the NIM These functions as described by Briston are:
a.Origination.
b.underwriting and
c.distribution
a) Origination:
This is the work which begins before an issue is actually floated in the market. The factors which have to
be carefully analysed are regarding the soundness of the project. It includes time of floating of an
issue.,Type of issue., and the price of the issue.
b. Under writing:
Under writing is kind of guarantee undertaken by an institution or firm of brokers ensuring the
marketability of an issue. Subscription is thus guaranteed even of the public does not purchase the shares
for a commission from the issuing company. These are:
LIC ,UTI, IDBI, ICICI,GIC, and Commercial Banks

C.Distribution: Distribution means the function of sale of shares and debentures to the investors.This is
performed by brokers and agents. They maintain regular lists clients and directly contact them for
purchase and sale of securities.
REGULATION OF PRIMARY MARKET:
The primary market is where securities are created, while the secondary market is where those securities
are traded by investors. In the primary market, companies sell new stocks and bonds to the public for the
first time, such as with an initial public offering. (IPO).
Investor's protection is SEBI’s primary focus, and to ensure it, SEBI has set up certain guidelines to
which everyone involved in the market should comply and upon non-compliance to its guidelines, SEBI
could take legal action against the non-compliant.
One such example of it is the Black Out Period set by SEBI. According to the Prohibition Under Insider
Trading (PBIT) rule by SEBI, If a piece of important news is set to be announced regarding a certain
company then no employee of that particular company could neither trade nor invest in the shares of that
company for a period of 48 days from the date the news broke out publicly.
This period of 48 days from the time the news broke out is called the Black Out period. It is set out to
protect the rights of the investors so that no individual gets an unfair advantage.
 SEBI plays an important role in safeguarding the rights of the investors and ensuring a level playing field
for all the investors whether big or small, foreign or domestic. Before the advent of SEBI, the stock
market was disorganized with frequent irregularities and malpractices taking place frequently.

Recognised Stock Exchanges in India:

BSE : BOMBAY STOCK EXCHANGES: Located in Mumbai and Year of Recognition

1957.
OTCEI – Over the Counter Exchange of India : Located in Mumbai and Year of Recognition
1994.
NSE : National Stock Exchange : Located in Mumbai and Year of
Recognition:1993
Regulations of stock Exchanges:
Regulations of Stock Exchanges:
 the interests of traders and investors, thereby, promoting fairness in the stock SEBI regulates Capital
Markets through certain measures it takes.
 Protects exchange.
 SEBI regulates how the security markets and stock exchanges function.
 SEBI regulates how transfer agents, stock brokers and merchant bankers, etc, function.
 SEBI handles the registration activity of new brokers, financial advisors, etc.
 SEBI encourages the formation of Self-regulatory Organizations.
 SEBI promotes investor learning opportunities.
 SEBI makes rules to prevent malpractice.
 SEBI manages and controls a ‘complaints’ division.
The Decisions of SEBI
The Indian stock market would be a hapless place without the regulations enforced by SEBI. With this in
view, SEBI has been responsible for taking several steps to ensure the seamless operation of stock
markets in India:
 Determination of Stock Pricing - In a recent SEBI announcement, all companies listed have been given
permission to decide their own share prices, plus a premium over and above this.
 No Insider Trading - One of the main loopholes in the Capital Markets of India was ‘insider trading’.
SEBI has abolished this practice which gives certain traders unfair advantages over others.
 Regulation of Mutual Funds - SEBI regulates control over mutual funds, both of the government and
private sector.
Trading system in Stock Exchange:
Overview of the Stock Exchange
 Also known as the stock market, it is a virtual form of trading, buying and selling shares in companies
 Transactions in the stock market can only be made with the help of brokers or authorised members
 The stock market needs to be recognised by the country’s government where it is operating
 There are four main kinds of stock: Preferred Stock, Common Stock, Growth Stock, and Yield Stock
 There are various features and functions of the stock market
 The stock market works as a facilitator of liquidity. This means that the shares can be converted into cash
as per those who invest
 The stock exchange is also a valuable feature of economic growth in the country due to the increase in the
number of investors
 It also helps in the pricing or valuation of the securities, thus benefiting the investors.
 A stock exchange also helps in speculative activities in the market for those who want to take part in
profitable investments by observing the market
 Due to the requirement of stock market to be recognised by the government, this body is a safe one for
investors
 Many steps are involved in the trading of shares in the stock market. Important Terms in Stock Exchange
 Bear: It refers to those speculators who take a negative outlook towards the market and predict the fall in
market prices
 Bull: These are speculators who predict a rise in prices and adopt a positive market view
 Broker: A broker is a person who is simply a middleman. They carry out all orders on transaction on
behalf of the investors
 Bonds: These are fixed-income investments that companies or the government issue to buyers
 Dematerialisation: It refers to the conversion of physical certificates to electronic ones
 Depository: This is a company or organisation that holds all securities electronically.
Steps of Trading Procedure
 The trading procedure involves the following five steps:
1. Selecting a Broker: The stock market involves trading through only authorised brokers. These brokers
can be individuals, companies, or even partnerships. To begin the trading process, one should select a
registered broker.
2. Opening a Demat Account: De mat is short for dematerialised. The Demat account is opened with the
help of depositories, which include brokers and banks. It is through this account that trading activities
take place. This is an electronic system. The depository helps keep the investor or account holder
informed about their transactions and the status of their investments.
3. Placing an Order: Once a Demat account is opened, investors can place orders in different ways, such as
through brokers or themselves. The order comprises the buying and selling of shares in the stock market.
4. Execution of the Order: Once an order is placed, it is executed by the broker. Once executed, a contract
note is issued, which informs the investor of all transaction details or orders, such as date, time, and
amount.
5. Settlement: This is the final step in the trading procedure. It involves the actual transfer of securities
between the buyer and the seller. This also needs to be carried out by the broker. The two main kinds of
settlement are On-the-spot settlement, where funds are immediately transferred and exchanged on the
second working day of the transaction, and Forward settlement, which implies that the transfer or
exchange will be carried out at some point in the future.
Conclusion
Stock exchange refers to a body where shares of companies are bought and sold. It operates only in areas
where the government recognises it. There are four kinds of stock: preferred stock, growth stock, yield
stock, and common stock. There are several steps involved in the trading procedure of the stock
exchange. The process begins with selecting an individual or company to trade, known as a broker. Then,
a Demat account is opened, an order is placed, which is then carried out by the broker and is ultimately
settled by the buyer and seller. The stock exchange helps in economic growth as well as increasing
liquidity.