The Secondary Market

Concept of Secondary Market

 It is commonly known as stock market or stock
exchange.
 Equity shares, bonds, debentures and derivative
products are traded on the stock exchanges.
 Well regulated and active stock market promotes
capital formation.
 Growth of the primary market depends on the
secondary market.
 Functions of Stock Exchange
Functions of the Stock exchange are:

 Maintenance of active trading

 Fixation of prices through supply and demand forces
 Ensuring safe and fair dealing
 Aiding in financing the industry
 Dissemination of information
 Inducing the company to perform well
 Regulatory Framework
 Means framing regulations in order to govern the
activities of the stock exchanges and the members.
 It is provided by the Securities Contract Regulation
Act, 1956 and the Securities and Exchange Board of
India Act, 1992.
 The regulatory structure consists of:
 Ministry of Finance
 Securities and Exchange Board of India
 The Governing Board
Ministry of Finance
Ministry of finance has supervisory powers over SEBI.

It has power to grant recognition to stock exchanges and regulation of their

operations
Securities and Exchange Board of India
SEBI has the power to regulate the business of stock exchanges, other

security markets and mutual funds.

Registration and regulation of market intermediaries are carried out by SEBI.

Takeovers are monitored by SEBI.

The Governing Board

The governing board of the stock exchange consists of elected member

directors, government nominees and public representatives.

The governing board has the responsibility to maintain an orderly and well-

regulated market.
 Members of Stock Exchange
 The Securities Contract Regulation Act, 1956
provides certain regulations for the admission of an
individual in the stock exchange.
 Following are the qualifications an individual must
possess in order to become a member of the stock
exchange:
 S/he must be 21 years of age.
 S/he should be a citizen of India.
 S/he should not be insolvent.
 S/he should not be convicted for malpractices.
 S/he should satisfy the capital adequacy norm.
 Types of Orders
 The investors place the buying and selling orders of shares
with the members of the stock exchange.
 Orders are of the following types:
 Limit order: It is an order in which the transactions are

executed only at a specified price..eg: buy ITC at Rs.250

 Best rate order: It is an order in which the investor
provides the freedom to the broker to carry out the order at
a favourable rate quoted on that particular date for the
purpose of buying.
 Discretionary order: It is an order in which various ranges
of prices are provided by the investor for the purchase and
sale of securities. A broker uses his discretion to buy within
a specified limit.eg: but HDFC around Rs.1300
 Stop loss order: It is an order to buy or sell orders when a
particular price, either below or above the actual price is
reached, due to unfavorable price movements in the
market. eg: Sell SBI at Rs.260 buy at Rs.240.
 Buying and Selling of Shares
 An investor, in order to buy or sell shares, must first
locate a registered broker.
 The investor after locating the broker must place an
order specifying the number of shares he intends to
buy or sell.
 The broker executes the order in his computer
terminal and matches the most appropriate order.
 The broker, after finding an appropriate order,
delivers a contract note to the investor.
 A contract note specifies the name of the company,
number of shares bought/sold, price, brokerage and
date of delivery of shares.
 Share Groups
 The shares of a company are divided into the
following categories in Bombay Stock Exchange
(BSE)
 Group A shares: Also referred to as specified shares
selected on the basis of:
 Track record
 Market capitalization
 Liquidity
 B1 and B2 groups represent equity segment
 F group – Debt segment
 C group – Odd lot segment – less that standard units
(100)
 Rolling Settlement System
In rolling settlement, trades outstanding at the end of
the day have to be settled at the end of T + X time
framework.

 T + 5 settlement was introduced on 2nd July 2001

 T + 3 settlement was introduced on 1st April 2002
 T + 2 settlement was introduced on 1st April 2003
 Online Trading
 The Internet is used as a medium for the trading of
shares online.
 In online trading, the orders of shares are placed with
the stock exchange through a website.
 The Securities and Exchange Board of India (SEBI)
has developed an Order Routing System (ORS)
 In ORS, the requirements for the shares are entered
by the investor.
 On execution of the order, the investor receives the
confirmation of the order.