Unit 3 – Secondary Market

Secondary markets play a crucial role in the exchange of securities than the primary markets.
Secondary markets are the place of exchange of second-hand securities, i.e., the securities
that have already been issued. Therefore, these markets are the ones where the shares are
bought and sold for a considerable long time. That is why secondary markets are more
influential than primary markets in the case of buying and selling of shares.

Functions of Secondary Market

Secondary markets perform some very important economic activities. Some of these are as
follows −
 Maintaining the Fair Price of Shares
The secondary market is a market of already issued securities after the initial public offering
(IPO). Capital markets run on the basis of supply and demand of shares. Secondary markets
maintain the fair price of shares depending on the balance of demand and supply. As no
single agent can influence the share price, the secondary markets help keep the fair prices of
securities intact.
 Offering Liquidity and Marketability
Second-hand shares are of no use if they cannot be sold and bought for liquid cash whenever
needed. The shareholders usually use the share markets as the place where there is enough
liquidity and marketability of shares. That means that the secondary markets play the role of a
third party in the exchange of shares.
Without a secondary market, the buyers and sellers would be left with a self-exchange in one-
to-one mode that is not quite effective till now. Therefore, the secondary market is a
facilitating body of liquidity and marketability for the shareholders.
 Facilitating Capital Allocation
Secondary markets facilitate capital allocation by price signalling for the primary market. By
signalling the prices of shares yet to be released in the secondary market, the secondary
markets help in allocating shares.
 Adjusting the Portfolios
Secondary markets allow investors to adapt to adjusting portfolios of securities. That is, the
secondary markets allow investors to choose shares for buying as well as for selling to build a
solid portfolio of shares that offers maximum returns. Investors and shareholders can change
their investment portfolios in secondary markets.
 Structure of secondary market

Secondary market participants in a stock exchange.

 Brokers: Stock exchange is a platform for listing securities, discovering their
price, trading securities and sharing information. (BSE and NSE). All stock market
trades are conducted through the members of the exchange, called brokers for a fee or
‘brokerage’.

 Issuers: Issuers are companies that list their securities on the stock exchange after
meeting listed criteria and signing the listing agreement with the exchange. (HDFC
Bank, RIL).

 Clearing House: Clearing Corporation enables settlement of funds or money and

securities between buyer and seller (NSCCL, ICCL).
 Investors: Investors open demat accounts with members of the depositories, called
depository participants to hold their securities and settle their trades.
  Listing Procedure
Benefits of Listing
The important advantages of listing are listed below
 Fund Raising and exit route to investors
Listing provides an opportunity to the corporates / entrepreneurs to raise capital to
fund new projects/undertake expansions/diversifications and for acquisitions. Listing
also provides an exit route to private equity investors as well as liquidity to the ESOP-
holding employees.

 Ready Marketability of Security

Listing brings in liquidity and ready marketability of securities on a continuous basis
adding prestige and importance to listed companies.

 Ability to raise further capital

An initial listing increases a company's ability to raise further capital through various
routes like preferential issue, rights issue, Qualified Institutional Placements and
ADRs/GDRs/FCCBs, and in the process attract a wide and varied body of
institutional and professional investors.
  Supervision and Control of Trading in Securities
The transactions in listed securities are required to be carried uniformly as per the
rules and bye-laws of the exchange. All transactions in securities are monitored by the
regulatory mechanisms of the stock exchange, preventing unfair trade practices. It
improves the confidence of small investors and protects them.

 Fair Price for the Securities

The prices are publicly arrived at on the basis of demand and supply; the stock
exchange quotations are generally reflective of the real value of the security. Thus
listing helps generate an independent valuation of the company by the market.

 Timely Disclosure of Corporate Information

The listing agreement signed with the exchange provides for timely disclosure of
information relating to dividend, bonus and right issues, book closure, facilities for
transfer, company related information etc by the company. Thus providing more
transparency and building investor confidence.

 Better Corporate Practice

Since the violation of the listing agreement entails the de-listing/suspension of
securities from the rings of the exchange, the listed companies are expected to follow
fair practices to the advantage of investors and public.

 Benefits to the Public

The data daily culled out by the stock exchange in the form of price quotations and
others; provide valuable information to the public which can be used for project and
research studies. The stock exchange prices can be an index of the state of the
economy. Financial institutions, NRl, individual investor’s etc. can take wise
decisions before making investments.

Listing Requirements and Process

An issuer, whose post issue face value capital is upto twenty five crore rupees is eligible to
get its securities listed on the SME (Small And Medium Size Enterprise) platform. An Issuer
has to take various steps prior to making an application for listing its securities on the SME
Platform of the Exchange. These steps are essential to ensure the compliance of certain
requirements by the Issuer before listing its securities on the Exchange. The various steps to
be taken include:
The Issuer shall file the draft prospectus along with the documents mentioned in the checklist
for IPO Vetting. The draft prospectus should have been prepared in accordance with the
SEBI Regulations, other statutes, notifications, circulars, etc. governing preparation and issue
of prospectus prevailing at the relevant time.
The Issuers may particularly bear in mind the provisions of Companies Act, Securities
Contracts (Regulation) Act, the SEBI Act and the relevant subordinate legislations thereto.
NSE will peruse the draft prospectus only from the point of view of checking whether the
draft prospectus is in accordance with the listing requirements, and therefore any approval
given by NSE in respect of the draft prospectus should not be construed as approval under
any laws, rules, notifications, circulars, guidelines etc.
Issuers desiring to list on the NSE pursuant to IPO shall make application for admission of
their securities to dealings on the NSE in the forms prescribed in this regard as per details
given hereunder or in such other form or forms as the Relevant Authority may from time to
time prescribe in addition thereto or in modification or substitution thereof.

 Stock Market Indices

National Stock Exchange
The National Stock Exchange (NSE) is the leading stock exchange in India and the fourth
largest in the world by equity trading volume in 2015, according to World Federation of
Exchanges (WFE). NSE was the first exchange in India to implement electronic or screen-
based trading. It began operations in 1994 and is ranked as the largest stock exchange in India
in terms of total and average daily turnover for equity shares every year since 1995, [based on
SEBI data].

NSE has a fully-integrated business model comprising our exchange listings, trading services,
clearing and settlement services, indices, market data feeds, technology solutions and
financial education offerings. NSE also oversees compliance by trading and clearing
members with the rules and regulations of the exchange.

NSE is a pioneer in technology and ensures the reliability and performance of its systems
through a culture of innovation and investment in technology. NSE believes that the scale and
breadth of its products and services, sustained leadership positions across multiple asset
classes in India and globally enable it to be highly reactive to market demands and changes
and deliver innovation in both trading and non-trading businesses to provide high-quality data
and services to market participants and clients.

Bombay Stock Exchange (BSE)

The Bombay Stock Exchange (BSE) is the first and largest securities market in India and
was established in 1875 as the Native Share and Stock Brokers' Association. Based in
Mumbai, India, the BSE lists close to 6,000 companies and is one of the largest exchanges in
the world, along with the New York Stock Exchange (NYSE), Nasdaq, London Stock
Exchange Group, Japan Exchange Group, and Shanghai Stock Exchange.

The BSE has helped develop India's capital markets, including the retail debt market, and
has helped grow the Indian corporate sector. The BSE is Asia's first stock exchange and also
includes an equities trading platform for small-and-medium enterprises (SME). BSE has
diversified into providing other capital market services including clearing, settlement,
and risk management.
 Established in 1875 as the Native Share and Stock Brokers' Association, the Bombay
Stock Exchange (BSE) is Asia's first exchange and the largest securities market in
India.
 The BSE has been instrumental in developing India's capital markets by providing an
efficient platform for the Indian corporate sector to raise investment capital.
 The BSE is known for its electronic trading system that provides fast and efficient
trade execution.
 The BSE enables investors to trade in equities, currencies, debt instruments,
derivatives, and mutual funds.
 The BSE also provides other important capital market trading services such as risk
management, clearing, settlement, and investor education.

Stock Market Indices

 Indices are economic barometers that give us a sense of whether the economy is doing
good or not. And a stock market index reflects the changes taking place in the market.
Similar listed stocks from the same sector are grouped together to create an index.
Popular benchmark (Oldest benchmark) indices in India are NIFTY (NSE) and
SENSEX (BSE), while broad-based indices are NIFTY 50 and BSE 100. NSE Indices
Limited, a subsidiary of NSE, provides these indices and index related services for the
capital market. The company is responsible for NIFTY indices of NSE. It consists of
broad-based indices, thematic indices, sectoral indices, customized indices and
strategy indices.

Sectoral Indices

The sectoral indices represent specific sectors and give benchmarking data of those
sectors in the market. For the purpose of sectoral indices, various sectors identified
are energy, healthcare, automobile, consumer products, technology &
communications, and financial. For example – Bank NIFTY in NSE’s sectoral index
represents the overall performance of the Indian banking sector. Sectoral indices are
reviewed on a semi-annual basis ending January and July.
Nifty and Sensex
The Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) are the two
principal stock exchanges in India that are currently active. Both exchanges are entirely
electronic, with a combined total of over 7,000 firms. Millions of trades take place on both of
these exchanges every trading day. Because these are electronic exchanges, a individual
wouldl need a demat account to participate in the trading process.

Sensex
The term Sensex is derived from the combination of the words sensitive and index and was
coined by Deepak Mohoni, a financial journalist. The Sensex is the benchmark index of the
Bombay Stock Exchange (BSE). Traders also refer to the Sensex as the S&P BSE Sensex.
Introduced in 1986, the Sensex is India’s oldest stock index and comprises the top 30 listed
companies in the BSE across a wide-range of sectors and industries.

Nifty
Also known as the National Stock Exchange Fifty, the Nifty is the benchmark index of the
National Stock Exchange (NSE). The index was introduced in 1996 and is also referred to as
CNX Nifty and Nifty 50 by traders. The Nifty comprises the top 50 companies across various
sectors and industries that are listed in the NSE. The index represents large-cap companies,
which generally have a good degree of liquidity and are traded in stock exchanges. These
companies represent approximately 70% - 75% of total market capitalization

International Securities Exchange (ISE)

The International Securities Exchange (ISE) is an electronic options exchange that was
launched in 2000. The exchange provides investors with greater liquidity and the ability to
execute transactions at a much faster rate than the open outcry trading floor that had
historically been the basis for options trading. In 2008, the ISE became a wholly owned
subsidiary of the communications company Direct Edge Holdings.1 In 2016, the ISE became
a wholly owned subsidiary of Nasdaq.
The International Securities Exchange (ISE) is an electronic options exchange launched in
2000; the ISE has been a wholly owned subsidiary of Nasdaq since 2016.
The ISE helps add liquidity to the market and reduce price volatility by providing
computerized trading for investors looking to buy and sell options contracts.
Before becoming a Nasdaq subsidiary, the ISE was owned by Deutsche Börse and then
Direct Edge Holdings.
Nasdaq's ISE offers its clients options trading for more than 3,000 underlying equities,
indexes, and exchange traded funds (ETFs).
Nasdaq membership is required to participate on the International Securities Exchange.

 Clearing House
A clearinghouse behaves as a middleman between any two entities or parties (buyers and
sellers) who are involved in any sort of financial transaction. It seeks to guarantee that the
process from the genesis of the trade until its settlement is plain sailing. It also makes sure
that the buyer and seller meet the obligations of their contract.
Clearing Houses works in most of the business areas in the world. Like in future markets: It
makes sure that both the parties( buyers and sellers) fulfill all of their obligations related to
the futures contract being traded and keep an eye on the proper delivery of that particular
instrument.

Functions/Role of Clearing House:

 Checking the financial potential of the parties: To ensure that the transaction between the
two parties happens smoothly, the clearinghouses checks on the financial potential of
their customers (either they are individuals or any organization) before they enter into any
legal transaction.
 Follow the proper procedure: The clearinghouses must see that all the parties involved in
the proceedings comply with all the rules and legal procedures for a favourable outcome.
 Setting up the terms of negotiation: The clearing house comes up with the common
ground where both the parties can agree upon the terms of their arrangement. This duty
comes with setting up the details of the contract like the maturity date, quality, and
quantity, price, etc.
 Right delivery of goods: The clearinghouse set the seal on the right delivery of goods
concerning the quality and quantity. This is done so that there is no scope of complaints
or arbitration thereafter.
 Imposing margin (initial and maintenance) requirements: To mitigate the cost and risk of
settling multiple transactions among multiple parties clearing houses impose margin
(initial and maintenance). Margin is a deposit of a percentage of the total value of the
contract.

Online Trading
When a user places the order for buying any particular stock on an online platform, his order
gets saved in the database of the trading member platform and the exchange platform. This
data is then used to look across all platforms selling that particular stock and display the
result with the best price available. If the price matches with the user’s demands and he
confirms the order, then the process is validated by both the parties. After all that is
completed, the broker usually has three days to complete the settlement of the money, and
hence, the money is transferred to your account.
Many online trading platforms provide analysis of stocks, which helps the users to find the
status of the stock market. This also helps them predict the situation of stocks in upcoming
days and shape their decisions. Online platforms attract users through ease of use and reduced
commission fees. Ultimately, having a properly funded account is essential to execute trades
smoothly on a platform.
RISK MANAGEMENT STRATEGIES IN THE STOCK MARKET
If one have decided to invest in the stock market, then he/she should be committed to put in
efforts to understand the balance sheets and annual reports of the company, the national and
global economy and factors like inflation, interest rate movements and commodity prices.

The below are the factors which would help a beginner or an investors to understand thee
stock market movements will help to develop a risk management strategies . Else, the
investments will be nothing more than a gamble.
 Follow the market momentum
A thorough study of various economic factors and historical trends in the market will enable
an investor or a trader to identify the direction in which the overall market, as well as
particular stocks, are moving. There may be some stocks that will do well despite high
inflationary pressures whereas the price of others may just fictional / temporary. An investors
needs to identify the momentum of the market and then plan your investments in a manner so
as to be able to successfully shield yourself from the negative impacts. This is one of the most
important risk management strategies in the stock market.
 Diversify
Never put all your eggs in one basket. In order to successfully minimise the risks involved in
investing in the stock market, spread your investments across different categories of asset
classes and companies. An investor should invest in individual stocks, ETFs and multi-cap
funds. In individual stocks also, investing in different sectors such as IT, Consumer Goods,
Banking and Pharma would help to balance the risks.

Investor Rights and Obligations

Investor Rights - Right To
 Get Unique Client Code (UCC) allotted
 Get a copy of KYC and other documents executed
 Get trades executed in only his/her UCC
 Place order on meeting the norms agreed to with the Member
 Get best price
 Contract note for trades executed
 Details of charges levied
 Receive funds and securities on time
 Receive statement of accounts from trading member
 Ask for settlement of accounts

Investor Obligations - Under Obligation To

 Execute Know Your Client (KYC) documents and provide supporting documents
 Understand the voluntary conditions being agreed with the member
 Understand the rights given to the Members
 Read Risk Disclosure Document
  Understand the product and operational framework and deadlines
 Pay margins
 Pay funds and securities for settlement on time
 Verify details of trades
 Verify bank account and DP account for funds and securities movement
 Review contract notes and statement of account
 Rights to Remedies
 Take up a complaint against member with the Exchange
 Take up a complaint against listed company
 File arbitration against member if there is dispute
 Challenge the arbitration award before court of law
 Obligation Towards Remedies
 Take up complaint within reasonable time
 Complaint to be supported by appropriate documents
 When additional information is called for provide the same
 To participate in resolution Investor Rights and Obligations

 Redressal of Investor Grievances

Investors can approach the Exchange at the Investors Grievance Department for the redressal
of their grievance/s against the registered Trading Member of the Exchange. Exchange has a
mechanism of resolving disputes by co-ordinating with the member and the complainant.
Any investor/ clients who has any complaint can lodge/register a complaint with the
Exchange in the prescribed “Client Complaint form (CCF)”.
On receipt of complaint in the prescribed format, Exchange initially tries to resolve the
complaint by following up with the member and the complainant. If the complaint remains
unresolved, it is referred to Arbitration.
For filing any complaints/grievances against Member of the Exchange, investors may mail
to grievance@mcxindia.com
Redressal of investor grievances through SEBI Complaints Redress System (SCORES)
platform
SEBI launched a centralized web based complaints redress system 'SCORES' in June 2011.
The purpose of SCORES is to provide a platform for aggrieved investors, whose grievances,
pertaining to securities market, remain unresolved by the concerned listed company or
registered intermediary after a direct approach.
SCORES also provides a platform, overseen by SEBI through which the investors can
approach the concerned listed company or SEBI registered intermediary in an endeavor
towards speedy redressal of grievances of investors in the securities market. It would,
however, be advisable that investors may initially take up their grievances for redressal with
the concerned listed company or registered intermediary, who are required to have designated
persons/officials for handling issues relating to compliance and redressal of investor
grievances
 Trading and Settlement mechanism in Indian Stock Exchange
There is a backend process with stock exchange known as the clearing process by which all
the financial trades are settled on a timely basis, i.e. the transfer of funds to the seller and
securities to the buyer. A specialized organization is responsible for clearing and settling all
the trades, which is known as the clearing corporation.
Clearing validates the availability of proper funds and securities and ensures the delivery of
the security and fund to the buyer and seller respectively. If trades are not cleared timely it
can result in settlement risk which can further lead to loss of capital and real money.
All the trades placed through NSE are cleared through NSCCL which is National Securities
Clearing Corporation Limited. It is the clearing and settlement agency for all trades placed
and executed on National Stock Exchange.
A time of T+2 days is required for the settlement of trades executed on the NSE. All trades
are usually settled in 2 working days after the trade is executed (T day). This time period does
not include the exchange holidays. The clearing and settlement process are carried out in
various phases

 Trade Recording
All the information related to an executed trade are recorded by automated systems at the
exchange. This information forms the base of settlement process. This is done on T+1 day.
For the settlement the trade details are first forwarded to the clearing house which is NSCCL
in case of NSE. The clearing house then notifies the details of the trade to the clearing
members and custodians as applicable. Instructions are forwarded to the clearing banks to
arrange funds for the trade settlement by pay in time.
A similar instruction is sent to the depository to arrange for the securities to perform the
following functions:
1. Pay-in of Funds and Securities
A pay in phase is started after that where depository and clearing bank both must pay-in the
securities and fund respectively for clearing and settlement. In case if the depository is not
able to pay in the securities due to short selling, the process takes T+3 days and an auction
window is opened for buying of the securities during the market hours on the T+2 day itself
and the settlement is thus completed on the T+3 day.
2. Pay-out of funds and securities
After the pay-in phase is completed and the securities and funds required for settlement are
successfully “pay-in” a pay-out phase is started where the securities and funds are paid out to
the respective depository and clearing bank.
The depository and clearing banks then inform the custodians or clearing members as
applicable. The complete pay-out process is executed on T+2 day.

Dematerialized Settlements
The dematerialization of securities has significantly reduced the settlement time by using
electronic modes for transfers wherever applicable with minimum human intervention to
make the process precise and fast.
Materialized securities are not settled through the above process and are usually settled
through over the counter processes which are time consuming.
The stock market is very volatile and trading and investing in the stock market becomes very
risky. The clearing and settlement also have various risks associated; therefore, a settlement
guarantee fund is involved with every settlement which comes handy in case a trading
member fails to meet his obligation. The members themselves contribute to the fund. This
results in elimination of counter party risk of trading on the stock exchange.