Secondary Market

Introduction

 The secondary market is where investors buy and sell securities they already own.

 It is what most people typically think of as the stock market

 In secondary markets, investors exchange with each other rather than with the issuing entity.

Control over secondary market

 1. Recognition of stock exchange

 2. Listing of securities

 3. Registration of brokers

Stock Exchange

 A stock exchange is an important factor in the capital market.

 It is a secure place where trading is done in a systematic way.

 Here, the securities are bought and sold as per well-structured rules and regulations.

 Securities mentioned here includes debenture and share issued by a public company that is
correctly listed at the stock exchange, debenture and bonds issued by the government
bodies, municipal and public bodies.

Functions of Stock Exchange

 Economic Barometer

 Pricing of Securities

 Safety of Transactions

 Contributes to Economic Growth

 Providing Scope for Speculation

 Liquidity

 Better Allocation of Capital

 Promotes the Habits of Savings and Investment

Features of Stock Exchange

 A market for securities

 Second-hand securities

 Regulate trade in securities

 Dealings only in registered securities

 Transaction through brokers

 Measuring device
  Rules and regulations

Listing of Securities

 Listing refers to the admission of the securities of a company on a recognized stock exchange
for trading .

 Listing of securities is undertaken with the primary objective of providing marketability,

liquidity and transferability of shares

Listing Regulations

 Comply with the Companies Act, SEBI and rules & regulations of the exchange.

 To be submitted along with the application for listing:-

 1. Memorandum of Associations, Articles of Association, Prospectus, Directors’ report,

Annual Accounts, Agreement with Underwriters, etc.

 2. Company’s activities, capital structure, distribution of shares, dividends and bonus shares
issued, etc

Objectives of Listing

 a) To provide ready marketability and liquidity of a company’s securities.

 b) To provide free negotiability to stocks.

 c) To protect shareholders and investors interests.

Steps in listing

1. Submission of Letter of Application along with the necessary documents.

2. Payment of Listing Fees.

3. Collection of Listing Fees.

4. Trading Permission by SEBI.

5. Payment of Security with the designated Stock Exchange.

6. Advertisement.

Advantages

 Better liquidity

 Better visibility and improves its image and reputation

 It makes future financing easier and cheaper

 Fair Price

 Facilitate buying and selling of securities

 Good Collateral security

Disadvantages

 Speculation

 No regular price quoting

 Listing fees

 Information to competitors

Delisting

 Delisting involves removal of listed securities of a company from a stock exchange where it is
traded on a permanent basis.

Trading system

 Auction driven

 Quote driven

Auction driven system

 Also known as order driven system

 Trading is done on the floor of stock exchange

 Mutually agreeable price between buyer and seller- no brokers

 No bargaining or negotiation

 Order-driven markets are seen as less liquid, but more transparent

Quote driven market

 Transaction takes place with the help of a broker

 Negotiated market

 Market maker announce two price – bid price and offer price

Method of trading

 Manual trading

 Online trading

Trading mechanism
 Finding a broker

 A broker acts as an intermediary or a mediator between the investor and the stock exchange.

 The work of a broker is transfer of order electronically from the investor to the exchange.

 Any transaction that occurs in stock market is taken care by the stock exchange.

 Normally in India the stock exchange for trading is active from 9:15 AM to 3:30 PM.

Opening Account With the Broker

 open an online trading account with the broker.

 A broker always opens a trading account in the name of the investor/ client once the cr.
worthiness of client is satisfactory

 The minimum requirement for opening a trading account is PAN card, and bank account.

Placing the Order

 Then the investor can begin the trading

 Different online trading platforms follow different symbols to mark the order placing.

 Order can also be placed via a telephonic call with the broker.

 There are different types of orders:

 Types of orders

 Buy Orders

 Buy orders are placed when the price of the share is expected to rise

 Sell orders

 Sell orders are executed when the investor feels that the price of the share will
decline

 Limit order

 Order for buying or selling of securities at a particular price as set by the investor.

 Stop Loss order

 order to sell the shares as soon as the price of the share falls up to a particular level

 Fixed Price order

 When the investor specifies the price at which he/she wants to buy/sell
  Market order

 It occurs mainly during intraday trading. When the buyer has bought the shares and
has not sold, the broker will sell it at Market Price

 Cancel order

 If the price is not matched then the order is cancelled and new fresh orders have to
be placed again

 Day order

 The validity of these orders is for the day in which they are put in the trading
platform

 Good Till Day order

 An order can be placed by the investor specifying the number of days for which the
orders will remain open.

Execution of the Order

 The orders are executed by the broker on behalf of the clients.

 The buy orders must tally the sell orders if not then the broker will sell/buy to match the
order.

Preparation of Contract Notes

 A written agreement between the broker and the investor for smooth execution of the
transaction

Contract Settlement

 The settlement is done by the clearing agency which functions in each stock exchange.

 The clearing agency delivers the share certificates by the end of the day.

 Dematerialized settlement

 NSE Clearing follows a T+2 rolling settlement cycle.

Online trading

 Online trading is the act of purchasing and selling financial products on the Internet.

 The trader buys and sells using an online trading platform.

 Online trading may include trading in bonds, stocks (shares), futures, international
currencies, and other financial instruments.

Benefits

 Lower fees.

 More control and flexibility.

 Ability to avoid brokerage bias.

  Access to online tools.

 Option to monitor investments in real time.

 Easier to invest too much too fast.

BSE

 https://www.bseindia.com/

NSE

 https://www1.nseindia.com/

Depository

 It is a place where financial securities are held in dematerialized form.

 It is responsible for maintenance of ownership records and facilitation of trading in

dematerialized securities.

 However, a Depository Participant (DP) is described as an Agent of the depository.

Depository Participant

 Depository Participant (DP) is described as an Agent of the depository.

 They are the intermediaries between the depository and the investors.

 The relationship between the DPs and the depository is governed by an agreement made
between the two under the Depositories Act.

 Dematerialization is entire process where digitized shares were transferred electronically in

“Demat Accounts“.

 This saves a lot of time and endless paper work.

 There are Depositories formed to facilitate this process.

 There are 2 Central Depositories in India

 1) Central Depository Services India Limited (CDSL)

 2) National Securities Depository Limited (NSDL)

Central Depository Services (India) Ltd (CDSL)

 It is the first listed Indian securities depository based in Mumbai.

 Central Depository Services (India) Limited (CDSL) was initially promoted by the BSE Ltd.
which thereafter divested its stake to leading banks.

 CDSL received the certificate of commencement of business from the Securities and
Exchange Board of India (SEBI) in February 1999.
  The main function of CDSL is to facilitate holding of dematerialized securities enables
securities transactions to be processed by book entry.

National Securities Depository Limited (NSDL)

 National Securities Depository Limited (NSDL) is an Indian central securities depository based
in Mumbai.

 It was established in August 1996 as the first electronic securities depository in India with
national coverage.

 G.V. Nageswara Rao- MD & CEO

DEMAT

 A Demat account is an account to hold financial securities in electronic form. In India, Demat
accounts are maintained by two depository organizations, National Securities Depository
Limited and Central Depository Services Limited

 While trading online, demat account is used to hold shares and securities in
dematerialized/electronic format.

 Under dematerialization, our share certificates are converted from physical form to
electronic form so as to increase their accessibility.

 We need a Demat Account number to settle trades electronically.

Derivative trading

 A derivative is an instrument whose value is derived from the value of one or more
underlying, which can be commodities, precious metals, currency, bonds, stocks, stocks
indices, etc.

 Most common forms of derivative instruments are Forwards, Futures, Options and Swaps.

Forward

 A forward contract is a customized contract between two parties, where settlement takes
place on a specific date in future at a price agreed today.

The main features of forward contracts are

 They are bilateral contracts and hence exposed to counter-party risk.

 Each contract is custom designed,

 The contract price is generally not available in public domain.

 The contract has to be settled by delivery of the asset on expiration date.

 In case the party wishes to reverse the contract, it has to compulsorily go to the same
counter party, which being in a monopoly situation can command the price it wants.

Future
  Futures are exchange-traded contracts to sell or buy financial instruments or physical
commodities for a future delivery at an agreed price.

 There is an agreement to buy or sell a specified quantity of financial instrument commodity

in a designated future month at a price agreed upon by the buyer and seller.

 To make trading possible, BSE specifies certain standardized features of the contract.

Option

 Options are a type of derivative security.

 An option is a derivative because its price is intrinsically linked to the price of something else.

 If you buy an options contract, it grants you the right, but not the obligation to buy or sell an
underlying asset at a set price on or before a certain date

 Types of Option

 There are two types of option:

 Put Option

 A put option gives the holder the right to sell a stock

 Call Option

 A call option gives the holder the right to buy a stock

Swap

 A swap is a derivative contract through which two parties exchange the cash flows or
liabilities from two different financial instruments.

 Most swaps involve cash flows based on a notional principal amount such as a loan or bond,
although the instrument can be almost anything

Venture Capital

 Venture capital is risky capital

 Venture capital (VC) is a form of private equity financing that is provided by venture capital
firms or funds to startups, early-stage, and emerging companies that have been deemed to
have high growth potential or which have demonstrated high growth

Stages

 Seed funding: The earliest round of financing needed to prove a new idea, often provided
by angel investors. Equity crowd funding is also emerging as an option for seed funding.

 Start-up: Early stage firms that need funding for expenses associated with marketing and
product development
  Growth (Series A round): Early sales and manufacturing funds. This is typically where VCs
come in. Series A can be thought of as the first institutional round. Subsequent investment
rounds are called Series B, Series C and so on. This is where most companies will have the
most growth.

 Second-Round: Working capital for early stage companies that are selling product, but not
yet turning a profit. This can also be called Series B round and so on.

 Expansion: Also called Mezzanine financing, this is expansion money for a newly profitable
company

 Exit of venture capitalist: VCs can exit through secondary sale or an IPO or an acquisition.

 Bridge Financing: is when a startup seeks funding in between full VC rounds. The objective is
to raise smaller amount of money instead of a full round and usually the existing investors
participate.

Documents

 They may include any or all of these documents:

 Plan of the project, term sheet, voting agreement, stock purchase agreement, right of first
refusal and co-sale agreement, management rights letter, Investor rights letter,
indemnification terms and any required amendment to the bylaws.

Features

 High Risk.

 Lack of Liquidity.

 Long term horizon.

 Equity participation and capital gains.

 Venture capital investments are made in innovative projects.

 Suppliers of venture capital participate in the management of the company.

Reforms in Secondary market

 Floor trade changed to online means.

 In 1992 foreign institutions investors have been allowed to invest in India.

 In 1994 NSE and OTCEI was set up with the screen based trading facility. After one year BSE
introduced the screen based trading system. And after that more and more stock exchanges
adopted screen based trading system

 In 1993 private sector mutual funds have been allowed.

 In 2001 Derivatives in the form of futures and options are introduced for trading and hedging
purpose.

 SEBI has made compulsory to all the intermediaries to register with it.
 At present trader can trade through laptops, palmtops and mobile phones also.

 The trading cycle has been shortened to T+2 from T+5 so that investor should not wait for
sale proceeds of his investments.

 At present almost 99% of the scrip's are dematerliased. Almost all the traders are in the
demat form.

 Now balance sheet and prospectus of the company are available to the investors.

 At present NAV has to be published.

 Insider trading and unfair practices are strictly prohibited.

Some important terms

 Buy – Means to buys shares or take position in a company.

 Sell – Getting rid of the shares as you have achieved your goal or want to cut down losses.

 Ask – Ask is what people who are looking to sell their stocks are looking to get for their
shares.

 Bid – Bid is what you are willing to pay for a stock.

 Bull – A bull market is a market condition where investors are expecting prices to rise.

 Bear – A bear market is a market condition where investors are expecting prices to fall.

 Capitalization – This is what the market thinks a company’s value is.

 Float – This is the number of shares which can be actually traded after deducting the shares
held by insiders.

 Authorized Shares – This is the total number of shares that a company can trade.

 IPO – It is an Initial Public Offering that happens when the private company becomes a
publicly traded company.

 Secondary Offering – This is another offering in order to sell more stocks and to raise more
money form the public.

 Dividend – Portion of the company’s earning which is paid to the shareholders.

 Broker – A broker is a person who buy or sell stocks on your behalf.

 Exchange – An exchange is a place where different types of investment are traded.

 Portfolio – A collection of investments owned by you.

Market capitalization

 Market capitalization, commonly called market cap, is the market value of a publicly traded
company's outstanding shares.

 Market capitalization is equal to the share price multiplied by the number of shares
outstanding.
 Companies are typically divided according to market capitalization:

 large-cap ($10 billion or more),

 mid-cap ($2 billion to $10 billion), and

 small-cap ($300 million to $2 billion).

Blue Chip Stocks

 The stocks of large industry-leading companies.

 Blue chip stocks offer a stable record of significant dividend payments and have a reputation
of sound fiscal management.

 The expression is thought to have been derived from blue gambling chips, which is the
highest denomination of chips used in casinos.

SENSEX

 Sensex also known as the Sensitive Index, Sensex is the stock market index of the Bombay
Stock Exchange (BSE) with a base value of 100, Sensex is the market-weighted stock index
which includes shares from the top, well-established 30 companies, based on their
performance and financial soundness.

 Furthermore, Sensex is calculated by using the free-float market capitalization method, and
the performance of the 30 selected stocks is directly reflected by the level of the index.

 Free-float methodology market capitalization is calculated by taking the equity's price and
multiplying it by the number of shares readily available in the market.

 NIFTY

 The National Stock Exchange Fifty (Nifty) is the stock market index of the National Stock
Exchange (NSE). Also known as NIFTY 50 and CNX Nifty, it comprises 50 stocks that are
actively traded on NSE, and is owned and managed by India Index Services and Products Ltd.
(IISL), a subsidiary of NSE.

 Furthermore, the base value of the index is 1000, and it is computed using the free-float
market capitalization method.