SECONDARY

MARKET

DHANANJAY KUMAR

M.A Economics

IIIrd Sem.

CUB1301212003

Central University of Bihar.

2013-15

Prepared By:------

Indian Financial System

• Consists of:-

• Financial Market

• Financial instruments

• Financial institution

• Financial services

Financial Market

Money Market

Financial Market

Capital Market

Capital Market

Capital Market

Primary Market Secondary Market

Equity Market Debt Market

Share Market Bond Market

Financial instruments that are traded in the

capital markets

• equity instruments

• credit market instruments,

• insurance instruments,

• foreign exchange instruments,

• hybrid instruments.

Suppliers and Borrowers

• . Major suppliers of funds in the capital market

1. Commercial banks.

2. Insurance companies.

3. Business corporations.

4. Retirement funds.

• Major borrowers in the capital market

1. Treasury departments.

2. Corporations.

3. Securities dealers.

Secondary Market

Secondary Market refers to a market where securities

are traded after being initially offered to the public in the

primary market and/or listed on the Stock Exchange.

For the G.I, the S.E provides an efficient platform for

trading of his securities.

For the management of the company, Secondary equity

markets serve as a monitoring and control conduit—by

facilitating value-enhancing control activities, enabling

implementation of incentive-based management

contracts, and aggregating information (via price

discovery) that guides management decisions.

Primary Market

In primary markets, securities

are bought by way of public

issue directly from the

company.

New issue are available in

primary market.

The primary is a middlemen.

New issue of common

stock;bonds and preferred

stock are sold by companies.

Secondary Market

In Secondary market share are

traded between two investors.

Securities usually bought and

sold through the secondary

market.

The secondary market are

broker and dealer.

The secondary market stock

and bonds issues are sold to

the public.

• Importance Of Secondary Market

• Advantage

• Disadvantage

• Characteristics of Secondary Market

1.Exchange

2.Over the counter

3.Capital gain

4.Liquidity

Functions of Secondary Markets

• Provides regular information about the value of security.

• Helps to observe prices of bonds and their interest rates.

• Offers to investors liquidity for their assets.

• Secondary markets bring together many interested

parties.

• It keeps the cost of transactions low.

Products available in the Secondary Market

Shares: Equity Shares, Rights Issue/ Rights Shares,

Bonus Shares, Preference shares, Cumulative

Preference Shares, Cumulative Convertible

Preference Shares

Bonds: Zero Coupon Bond, Convertible Bond, Treasury

Bills,

Government Securities

Debentures

Commercial Papers

Participants in the Secondary Market

• Stock Exchange

• Clearing Corporation

• Depositories/ DP

• Trading Member (Stock Broker)/ Clearing Member

• Broker--- INB

• Sub- Broker-INS

• Brokers of derivative segment--INF

• Registrar to an Issue and Share Transfer Agent

Getting started

• To start trading the following are required –

• Trading account

•Member – Client Agreement

•Risk Disclosure Document

• Demat account

• Bank account

• Permanent Account Number (PAN)

• Unique Client Code- KYC Norms

Where to trade

• The secondary market is divided into two segments –

• Cash/ Equity segment

• Derivative segment –

•Equity Futures and Option (F & O) – Index /Single Stock

•Currency Futures/ Option

• Interest Rate Futures

How to trade

• Trade through a SEBI registered Stock Broker, by -

• Placing margins as required with the broker

• placing order over the phone

• email etc.

• Internet Trading

• Wireless / Mobile Trading.

Post Trade

• The stock broker is required to provide contract notesconfirming the trades done within 24 hrs of executingthe trade

• The contract notes can either be in physical or electronicform

Charges by the Stock Broker

• Brokerage charged by member broker (maximum 2.5%)

• Service tax as stipulated

• Securities Transaction Tax

• Penalties arising on specific default on behalf of client(investor)

• Securities Transaction Tax (STT) is a tax being levied

on all transactions done on the stock exchanges at

rates prescribed by the Central Government from time

to time.

Securities and Exchange Board of

India

Settlement

• The settlement in the securities market is done ona T+2 Rolling Settlement Cycle (where T =Trading Day).

Trading

(T)

Option of

Early Pay-in

(T1)

Auction

(T3)

Close out

(T4)

Pay-in and

Pay out

(T2)

TRADE SETTLEMENTT + 2

FAILURE

TO

PAY-IN

Settlement – Auction And - Close Out

• Incase there is a shortage in Pay-in of shares at the time of settlement on T+2, the Stock Exchange purchases the requisite quantity in the Auction Market and gives them to the buying trading member.

• If the shares could not be bought in the auction i.e. if shares are not offered for sale in the auction, the transactions are closed out as per SEBI guidelines

Pay-in and pay-out days for funds and

securities for Normal SettlementActivity Day

Trading Rolling Settlement Trading T

Clearing Custodial Confirmation T+1 working days

Delivery Generation T+1 working days

Settlement Securities and Funds pay in T+2 working days

Securities and Funds pay out T+2 working days

Post Settlement Valuation Debit T+2 working days

Auction T+3 working days

Bad Delivery Reporting T+4 working days

Auction settlement T+5 working days

Close out T+5 working days

Rectified bad delivery pay-in and pay-out T+6 working days

Re-bad delivery reporting and pickup T+8 working days

Close out of re-bad delivery T+9 working days

For redressing my grievances

• We have following recourses available:

• Office of Investor Assistance and Education (OIAE) : You can lodge

a complaint with OIAE Department of SEBI against companies for

delay, non-receipt of shares, refund orders, etc., and with Stock

Exchanges against brokers on certain trade disputes or non receipt

of payment/securities.

• Arbitration: If no amicable settlement could be reached, then you

can make application for reference to Arbitration under the Bye

Laws of concerned Stock Exchange.

• Court of Law

• http://www.sebi.gov.in/Index.jsp?contentDisp=Section&sec_id=1

SECONDARY MARKET

TRADING MECHANICS

• TYPES OF ORDERS

1-Market OrdersThe simplest type of order is the market order,an order

executed at the best price available in the market.If more

buy orders and sell orders reach market at the same time,

the price can obtain.Buyers give priority offering lower price.

Sellers give offering higher price.

If there are more than one order at the same price.The

priority rule is based on the time of arrival of the order.

The danger of a market order is that an

adverse move may take place between the

time the investor places the order and the

time the order is executed.

2-Limit Orders

• It designates a price treshold for the execution of

trade.It is a conditional order.

A buy limit order indicates that the security may be

purchased only at the designated price or lower.

A sell limit order indicates that the security may be

sold at the designated price or higher.

• The danger of limit order is that it comes

with no guarantee it will be executed at all.

The designated price may not be obtainable.

3-Stop OrderStop order specifies that the order is not be

executed until the market moves to a designated

price at which time it becomes a market order.

A stop order to buy specifies that the order is

not to be executed until the market rises to a

designated price.

A stop order to sell specifies that the order is

not to be executed until the market price falls

below a designated price.

• Two dangers of stop order:

1-Security prices sometimes exhibit abrupt price changes.

2-Stop order can be subject to the uncertainty of the execution price.

4-Market if Touched Orders

• This order becomes a market order if a designated

price is reached.However,a market-if-touched order

to buy becomes a market order if the market falls to

a given price.A market-if-touched order to sell beco-

mes a market order if the market rise to a specified

price.

5-Time Specific Order

• Orders may be placed to buy or sell

at the open or close of trading for the

day that is time specific orders.

6-Size Related Orders

For common stock,orders are also classified

by their size.

A round lot is typically 100 shares of a stock.

An odd lot is defined as less than a round lot.

A block trade is defined as an order of 10.000 shares of

a given stock.

Stock Exchange

• It is a place where buying and selling of Securities takes

place.

• Regulatory Authority : SEBI

• trading platform provided by NSE: Electronic

• There are 23 stock exchanges in India.

• In India we have Bombay stock exchange , National

stock exchange and the rest 21 are Regional stock

exchanges.

Other 21 Regional Stock Exchanges in India

• Bombay Stock Exchange • National Stock Exchange

• Ahmedabad Stock Exchange • Bangalore Stock Exchange

• Bhubaneshwar Stock Exchange • Calcutta Stock Exchange

• Cochin Stock Exchange • Coimbatore Stock Exchange

• Delhi Stock Exchange • Guwahati Stock Exchange

• Hyderabad Stock Exchange • Jaipur Stock Exchange

• Ludhiana Stock Exchange • Madhya Pradesh Stock

Exchange

• Madras Stock Exchange • Magadh Stock Exchange

• Mangalore Stock Exchange • Meerut Stock Exchange

• OTC Exchange Of India • Pune Stock Exchange

• Saurashtra Kutch Stock Exchange• Uttar Pradesh Stock Exchange

• Vadodara Stock Exchange

• REGULATORY AUTHORITY

• Regulatory authority is the one which is under the

government surveillance.

• A few Stock Exchange companies follow the rules which

are laid down by the government of India.

• Example: 1) SEBI:- (Securities Exchange Board of

India)

• Demutualisation of stock exchanges

• Demutualisation refers to the transition process of an

exchange from a “mutually-owned” association to a

company “owned by shareholders”.

• Mutual Exchange

LONDON INTERNATIONAL STOCK

EXCHANGE

FRANKFURT STOCK EXCHANGE

PARIS BOURSE

TOKYO STOCK EXCHANGE

ISTANBUL STOCK EXCHANGE

Top 10 Stock Exchange in World• New York Stock Exchange (NYSE) - Headquartered in New

York City. Market Capitalization (2011, USD Billions) – 14,242;

Trade Value (2011, USD Billions) – 20,161.

• NASDAQ OMX - Headquartered in New York City. Market

Capitalization (2011, USD Billions) - 4,687; Trade Value (2011,

USD Billions) – 13,552.

• Tokyo Stock Exchange - Headquartered in Tokyo. Market

Capitalization (2011, USD Billions) – 3,325; Trade Value

(2011, USD Billions) – 3,972.

• London Stock Exchange - Headquartered in London. Market

Capitalization (2011, USD Billions) – 3,266; Trade Value

(2011, USD Billions) – 2,871.

• Shanghai Stock Exchange - Headquartered in Shanghai.

Market Capitalization (2011, USD Billions) – 2,357; Trade

Value (2011, USD Billions) – 3,658.

• Hong Kong Stock Exchange - Headquartered in Hong Kong.

Market Capitalization (2011, USD Billions) – 2,258; Trade

Value (2011, USD Billions) – 1,447.

• Toronto Stock Exchange - Headquartered in Toronto. Market

Capitalization (2011, USD Billions) – 1,912; Trade Value

(2011, USD Billions) – 1,542.

• BM&F Bovespa - Headquartered in Sao Paulo. Market

Capitalization (2011, USD Billions) – 1,229; Trade Value

(2011, USD Billions) – 931.

• Australian Securities Exchange - Headquartered in Sydney.

Market Capitalization (2011, USD Billions) – 1,198; Trade

Value (2011, USD Billions) – 1,197.

• Deutsche Börse - Headquartered in Frankfurt. Market

Capitalization (2011, USD Billions) – 1,185; Trade Value

(2011, USD Billions) – 1,758.

Stock Trading

• Screen Based Trading

• NEAT: National Exchange for Automated Trading

• Placing orders with the broker.

• Contract Note

• details are required

• maximum brokerage: 2.5%

Step 1. Investor / trader decides to trade

Step 2. Places order with a broker to buy / sell the

required quantity of respective securities

Step 3. Best priced order matches based on price-

time priority

Step 4. Order execution is electronically

communicated to the broker’s terminal

Step 5. Trade confirmation slip issued to the investor /

trader by the broker

Step 6. Within 24 hours of trade execution, contract

note is issued to the investor / trader by the broker

Step 7. Pay-in of funds and securities before T+2 day

Step 8. Pay-out of funds and securities on T+2

day

SEBI Risk Management System

The primary focus of risk management by SEBI has

been to address the market risks, operational risks and

systemic risks.

SEBI has been continuously reviewing its policies and

drafting risk management policies to mitigate these risks,

thereby enhancing the level of investor protection and

catalyzing market development.

Direct Market Access (DMA)

• Direct Market Access (DMA) is a facility which allows

brokers to offer clients direct access to the exchange

trading system through the broker’s infrastructure without

manual intervention by the broker. Some of the

advantages offered by DMA are direct control of clients

over orders, faster execution of client orders, reduced

risk of errors associated with manual order entry, greater

transparency, increased liquidity, lower impact costs for

large orders, better audit trails and better use of hedging

and arbitrage opportunities through the use of decision

support tools / algorithms for trading. Presently, DMA

facility is available for institutional investors.