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Badla was an indigenous carry-forward system invented on the Bombay Stock Exchange as a solution to the perpetual lack of liquidityin

the secondary market. Badla were banned by the Securities and Exchange Board of India or SEBI in 1993 (effective March 1994), amid complaints from foreign investors, with the expectation that it would be replaced by a futuresand-options exchange.[1] Such an exchange was not established and badla were legalized again in 1996 (with a carryforward limit of Rs 20 crore per broker) and banned again on July 2, 2001, following the introduction of futures contracts in 2000.[2][3] Badla trading involved buying stocks with borrowed money with the stock exchange acting as an intermediary at an interest ratedetermined by the demand for the underlying stock and a maturity not greater than 70 days. Like a traditional futures contract, badla is a form of leverage; unlike futures, the brokernot the buyer or selleris responsible for the maintenance of the marked-to-market margin.[4] The mechanism of badla finance can be explained as follows: Suppose A has to buy 100 shares of a company at Rs 50 each. But he doesn't have enough money now. But the value of shares is very less now, so in order to buy the shares at current prices, A can do a badla transaction. Now there is a badla financier B who has enough money to purchase the shares, so on A's request, B purchases the shares and gives the money to his broker. The broker gives the money to exchange and the shares are transferred to B. But the exchange keeps the shares with itself on behalf of B. Now, say one month later, when A has enough money, he gives this money to B and takes the shares. The money that A gives to B is slightly higher than the total value of the shares. This difference between the two values is the interest as badla finance is treated as a loan from B to A. The rate of interest is decided by the exchange and it changes from time to time.

he badla system, which allowed transactions to be carried forward from one trading valan to the next, was banned by the SEBI in March 1994. SEBI was hoping that for the purpose of speculative trading, an internationally accepted system of options and index future trading would replace the indigenously evolved badla system. To call badla trading a kind of forward trading is misleading. Badla is carryover of a transaction and not a forward transaction. While derivative trading (i.e. futures and options trading) is a trading in future risk among different participants in the stock market, mostly used as a hedging device. To have a strong cash market with sufficient liquidity, some element of leveraged (i.e. speculative) trading is necessary. Now this is possible only if the system provides: a) facility to buy shares on margin, and b) facility to sell short. Badla system fell into disrepute because of its faulty implementation and lack of proper monitoring by concerned stock exchange authorities. Particularly, the margins collected were low, allowing excess leveraged trading and not having proper monitoring and surveillance. With proper framing of rules and regulations, chances of its misuse would be reduced considerably; without incurring large efficiency losses associated with financial regulations. These costs associated with financial regulations include both the direct element (the compliance cost) and the indirect element (i.e. the damage inflicted on the competitiveness, dynamism and innovativeness of the system, the possible reduction in investor choice, the distortions included in market behaviour and business practice etc). Further, regulatory framework should also ensure competitive neutrality among different participants on the stock exchanges. SEBI reconsidered its decision and badla was reintroduced in July 1995 with severe conditions. In this paper, these conditions are critically evaluated. A few modifications are suggested. 1. not to insist on segregation of transactions at the time of trading. 2. not to insist on separate identification of each transaction with an audit trail and limit of 90 days for completion of transaction. 3. not to impound profits and streamline the daily and carryover margin requirements. 4. Financiers not to trade on securities but allowed to hold securities with them. Suggested changes would make the system cost effective, less complex, easy to implement, and will ensure level playing field among different market participants.

Badla financing: a way to wealth or poverty?


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Did your broker tell you about the superlative returns offered by badla financing and tempt you? But wait. Before going for badla financing, read this article on what badla financing is all about and its inherent risks. Many brokers might have told you that badla financing offers you returns in excess of 20% along with safety, liquidity and flexibility. But what they dont tell you is the high level of risk associated with this method of investment. Badla is actually a complicated system, laced with many pitfalls for those who are ignorant and unaware about the system.

What is badla financing: Badla is also known as vyaj badla in Indian stock market parlance. At any point of time, people are buying and selling shares in the stock market. But it is not necessary that the number of sellers equals the number of buyers. If the number of sellers exceeds the number of buyers, these extra sellers should be paid for selling their shares. This payment is made by vyaj badla financiers, who charge interest (badla). How do the financiers make money: Once the days trading is over, the brokers list out their positions where they are assured of taking/making deliveries as for delivery positions. This helps the exchange calculate the net outstanding positions as on Friday evening (the final day of settlement on BSE) by subtracting them for the broker's ouststandings for the week. This difference is then traded on BSE's badla trading session, conducted on Saturday. Before the session, the base price (hawala price) is set, which is usually the last closing stock price. An undelivered "buy" position in scrip is known as a seedha badla in which the financers take part, while an unfulfilled "sell" position in the scrip is known as an ulta or undha badla in which the stock lenders take part. Specific amounts of shares available are purchased and sold at the financier's expected interest rate (badla rate). This interest is the financiers income. What are its benefits: The sole benefit is high returns of 24% in the rising market. What are the risks: The disadvantages are many; returns less than 8% in the falling market; high brokerage (2.5% maximum) can reduce your returns, loss of principal due to default by broker/forward buyer and lack of stock selection, since the brokers decide which stock to choose, putting your money at their mercy.

Looking at the disadvantages associated with badla financing, it is safe to state that this investment option is very risky. So think carefully before being taken in by your brokers enticements. Have you ever indulged in badla financing? What was your experience like? Would you recommend it to other investors? Who do you think will benefit from this method?

BSE may reintroduce badla in a new, squeaky clean image


by Rajesh Pandathil Jul 23, 2012

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The battle for market share is hotting up in the stock market space. With the MCX-SX getting clearance to start a stock exchange, the Bombay Stock Exchange, the oldest in Asia, is dipping into its rich history to rehash an earlier informal system that enabled market participants to delay delivery of securities for a fee. The system was called badla and was widely used before the 1990s to carry forward trades. Under this system, a financier helps a buyer buy a stock, but the buyer defers taking delivery of the securities until he has cash in his hand. The buyer also pays an interest on the amount borrowed from the financier, which is a fee for the badla transaction. Both buyer and seller were allowed to use the badla system. The system boosted speculation and liquidity in the market.

At the settlement, the one who has purchased the shares will get the stock at the agreed spread and the other the interest. AFP

It functioned more or less like futures and options. The system met with a natural death after the National Stock Exchange became operational and people moved to the derivatives segment, which offers more protection as it is under strict regulator scrutiny. According to a report in Business Standard, the BSE is now planning launch a new derivative product called cash futures spread (CFS).

Unlike badla, which was not adequately monitored, the new product will be less risky and more transparent, the report said. Back-room financing will not be permitted. In the badla system, this was one of the biggest risks. In the new product, a trader can enter cash and future spread trades in a single order. The exchange will put out a price quote for the cash-future spread of a particular security. Three cash-future spread will be available for trade at any given time in a security for the current, next and third month futures. At the settlement, the one who has purchased the shares will get the stock at the agreed spread and the other the interest. In other words, the spread is cost of carry for one trader in the futures segment while it is interest on financing for another trader. CFS is likely boost healthy speculation and improve liquidity in the market, Alok Churiwala, managing director of Churiwala Securities, has been quoted as saying in the report.

THE BADLA SYSTEM Introduction When a bull market is gaining hold and when shares prices are expected to reach dizzying heights, the one common refrain among the small investors is the lack of alternatives for multiplying returns through leveraging one's investment. The question often arises when one has the capacity and standing to mobilize funds for investing in the market and one is looking for a systematic investment avenue. We have heard of "options", "futures", and the even more exotic "derivatives", all of which help in increasing one's returns many times over - if used correctly. The sophisticated derivatives which are in existence abroad developed from the commodity markets there. In India, sophisticated financing techniques existed in our commodity markets for centuries, long before the concept of options came into existence abroad. With the beginning of the stock markets, many of these techniques which closely approximated options and futures came into our financial markets and the even more exotic "derivatives" thrived till they were banned in the '60s. One relic from those times still exists the much maligned but still useful - badla financing. Badla can be useful for an active investor if he wishes to leverage on his investments thereby multiplying his returns. The concept of Badla: Badla, in common parlance, is the Carry-Forward system which means getting something in return. The badla system of transactions has been in practice for several decades in the Stock Exchange, Mumbai. The badla system serves an important need of the stock market. If an investor feels that the price of a particular share is expected to go up or down, without giving or taking the delivery he can participate in the possible fluctuation of the share. Financing in Badla, in effect, has two aspects to it, namely 1. Seedha badla or Vyaj badla- Here the financiers participate 2. Undha badla - Here the stock lenders participate. What is Badla? In the badla system, a position is carried forward, be it a short sale or a long purchase. In the event of a long purchase, the market player may want to carry forward the transaction to the next settlement cycle and for doing this he has to compensate the other party in the contract .The 'seedha badla' financier enters into the system to lend money to the market player for a return. This is measured as interest on the funds made available for one settlement cycle, i.e. one week or a longer period in case of book closure badla system. Similarly 'undha badla' or contango charges are returns paid by the stock borrower to the stock lender. In a short sale, when the market player wants to carry forward the transaction to the next settlement cycle, he has to borrow the stocks to compensate the other party in the contract. The

charge paid on the borrowed stock is called contango charges. How is Baadla done ? On every Saturday in the Stock Exchange, Mumbai, a badla session is held. The scrip in which there are outstanding positions is listed along with the quantities outstanding. Depending on the demand and supply of money, the carry forward rates are determined. If the market is over bought, the demand for funds is more and the badla rates tend to be high. However, when the market is oversold , the badla rates are low or even reverse i.e. there is a demand for stocks and the person who is ready to lend stocks gets a return for the same. This is known as the undha badla. We can use an example to illustrate the concept of badla trading. You have purchased 100 shares of INFOSYS for Rs 7000, which is trading at Rs 7180 in the market at the end of the trading session which runs from Monday to Friday in BSE. You feel that the stock price will rise further. Therefore you wish to carry the contract forward to the next trading session by paying what are called badla charges. In any badla transaction there are two key elements, the hawala rate and the badla charge for the scrip. The badla charge is the interest payable by the investor for carrying forward the position. The badla charge, as explained earlier, is market determined and primarily dependent on the supply of funds for financing a share. It is fixed individually for each scrip by the exchange every Saturday and it is calculated on what is called the hawala rate.The hawala rate is the price at which a share is squared up in the current settlement and carried forward into the next settlement in the next trading session. The existing position you have is squared up against the hawala rate fixed and carried forward after factoring in the badla rate. The difference is paid to your broker or received from him. You have purchased 100 shares of INFOSYS at Rs.7000 in the current settlement and you wish to carry it forward to the next settlement. You have indicated to your broker that you wish to carry forward the transaction. The hawala rate is fixed at Rs.7180 and the badla rate say is fixed at Rs.24.23 for the settlement usually a week. The badla charge works out to an annualised rate of 18%, but badla is usually denoted in actual cash terms. In this case, the badla charges accrues to the investor. If the hawala rate is lower than the initial rate, the difference has to be paid to the broker.In actual practice, your broker will request you to maintain a margin for arranging the badla finance. There can be other charges too and it can vary from broker to broker. All the charges apart from the badla charges depend on your relationship with your broker. The amount of leverage you get, effectively, depends on the margin insisted upon by your broker. If your broker insists on a 25% margin, you get 400% leverage or four times the amount you are ready to deposit as margin. At the end of each settlement, you carry forward your position at the hawala rate. This position will also be adjusted for badla. You can carry forward the transactions for settlements. The use Badla to leverage one's positions? The concept of badla can be works as follows: Suppose you purchase 100 shares of HDFC Bank for Rs250, and the stock closes at Rs260 at the end of the trading session. You feel that the stock has potential to rise further in the coming days and you would like to hold the shares, however you do not have funds to pay the price and take delivery. The way out is to enter into a badla transaction, which your broker will carry out on your behalf. Thus on Saturday during the badla session the market will arrive at a rate at which the financiers are willing to lend you funds to carry forward your HDFC Bank position. The funds that the financier supplies will be passed on the seller who is not aware that the shares he has sold in the market have not been delivered but are outstanding. In any badla transaction there are two key elements namely the hawala rate and the badla charge for the scrip. The badla charge is the interest payable by the investor for carrying forward the position. The badla charge, as explained earlier is market determined. It is fixed individually for each scrip by the market every Saturday and it is calculated on the hawala rate. The hawala rate is the price at which a share is squared up in the current settlement and carried forward into the next settlement in the next trading session (hawala entry is akin to a journal entry passed in double entry system of accounting). The existing position you have is squared up against the hawala rate fixed and carried forward after factoring in the badla rate. If the stock where you have decided to carry forward your position (either long or short) is very high you end up paying high badla charge consequently if the demand is low the badla rates are low. Say the 100 shares of HDFC Bank that you had purchased at Rs250 in the current settlement, which you now wish to carry forward to the next settlement. The hawala rate is fixed at Rs260 and the badla rate is fixed at Rs.0.85 for the settlement, which is usually a week. The badla charge works out to an annualized rate of 17%, but the badla is usually denoted in actual cash terms. Your purchase rate 250.00 Hawala rate 260.00 Difference 10.00* Add Badla charge 0.85 Carried forward rate 260.85 *(Accrues to the investor in this case. If the Hawala rate is lower than the initial rate, the difference has to be paid to the broker). In actual practice your broker will request you to maintain a margin for arranging the badla finance. There can be other charges too and it may vary from broker to broker. All the charges apart from the badla charges depend on your relationship with your broker. The amount of leverage you get effectively depends on the margin insisted upon by your broker. If your broker insists on a 20% margin you get a 500% leverage or five times the amount you are ready to deposit as margin. At the end of each settlement you carry forward your position at the hawala rate and it is adjusted for badla. You can carry forward the transactions for settlements. For the lay investor, badla offers another opportunity for investment - as a badla financier. This scheme offers an annual return of close to 18 to 24 per cent, which eventually works out to 16 and 22 per cent after deducting brokerage. As a badla financier you provide finance to the person who wants to take badla. As a badla financier, you are not required to take any risk of bad delivery or forged and fake shares or for physical mishandling of shares. No tax is deducted at source for the interest you receive, and in terms of liquidity you receive your

money back on the 11th day from the Friday of the week in which you inform your broker. The shares against which finance is given are kept in the custody of the clearing-house of the Exchange. Caveats However, the mechanism of badla financing can be a bit complicated when bonus, rights, dividends are declared or when books are closed. Therefore it is always advisable to understand the process fully before venturing into this area. It is meant for active investors with a speculative bend of mind. This automatically implies a certain capacity to bear losses.

Drawbacks More than speculation per se, there are a couple of things that always bothered lay investor about the way the carry forward system or "badla" worked. The most worrying was the uncertainty about the interest (badla) rates, in addition to the uncertainty of the share price movement - especially since these appeared to have little correlation. Badla rates vary widely from week to week, and even in the same settlement. If the investor knew a-priori what the carry-forward rate would be, then the investor could calculate the risk-reward equation much better. My second problem was the duration of the carry-forward. One week is too short for the investors liking. For instance, in today's depressed market the investor might be willing to take a call on Infosys or HLL six months down the line, but one week is impossible. Of course, this is born of my personal investment style, but the point is that the instruments should allow for long (or short) positions of varying periods. In recent weeks, we have seen a barrage of articles defending the badla system, and condemning SEBI's action in proposing to ban carry forwards. Though academics and experts agree that derivatives are the best long-term solution, market-men disagree. Their arguments centre on the immediate impact of the ban. The crux of the problem is that trading volumes will collapse. This will impact not only traders, but also investors who will suffer due to poor liquidity. Needless to say, the worst affected will be the financial community (brokers) - whose business will dwindle considerably. The unwinding of long positions will also cause a near-term crash (already underway). As usual, critics and vested interests are calling for a "rollback". Some of them have even gone on to criticize futures and options, saying they are too complex, and will take a very long time to catch on. In this context, the lack of popularity of index futures in India is cited as proof of their unsuitability. Investors agree with the idea that speculation is a must for healthy markets. However, the system must be transparent and fool-proof, which badla is not. In the recent past, operators have succeeded in manipulating carry-forward positions through internal transactions. The source of funding for badla is never clear, and much is dependent on the ability of speculators to arrange financing. This could conceivably come from their own pockets, allowing them to ensure that interest rates are lower than gains in any particular scrip. As for volumes, they will be definitely impacted - but for all you know, this could provide a much needed boost to the B group stocks currently languishing for lack of interest. A market with 6000 scrips, of which only 200 are actively traded, is not a healthy sign. Typically, since inclusion in the forward category is decided on the basis of volumes alone and by people (BSE members) who might have vested interests, the system encouraged market operators. The lack of success of futures is not conclusive, as one could argue that they haven't taken off because the financial community has a vested interest in keeping badla alive. The lack of investor awareness about the new instruments is also not a valid reason to delay options, as Indian traders are smart and will pick up the nuances quickly enough, especially if they have no other option (pun intended). To the investor the major issue right now concerns SEBI's implementation tactics, which definitely leave much to be desired. Rather than a blanket ban with almost no notice, a well-defined transition period would have been more appropriate. Though badla is slated to end next month, we still don't have a clear timetable for introduction of options. Actually, this is where SEBI should be far more proactive and ensure that options for hundreds of scrips become available, and quickly. However, taking a long-term view, one must recognise that the switch to derivatives is inevitable. It is probably better to do it now and get it over with, than to postpone the birth pains. Badla grossly misused in capital markets: JPC Capital market experts deposing before the joint parliamentary committee probing the stock scam said on Friday that badla system as practised in the country has been grossly "misused" leading to total erosion of small investors' confidence in the bourses. Briefing newsmen on Friday's proceedings, JPC chairman, Shriprakash Mani Tripathi said two experts, S C Gupta and Ajit Dey, former Calcutta Stock Exchange president, felt the badla system (forward trading) in India had a lot of scope for misuse, which the brokers took advantage of. Though the experts view on whether the Indian stock exchanges should have badla system or not was divergent, they were unanimous on the total misuse leading to erosion of investors' confidence particularly that of small investors, he said. The badla system was banned in the country from 1994 to1996 after the 1992 multi-billion securities scam (Harshad Mehta). It was reintroduced after D R Mehta took over as Sebi chairman. It is now being banned from July 2 in the face of the recent stock scam. Banning of badla system, no doubt, reduces the volatility of the capital markets, but at the same time it grossly reduced the volume of the trading, Tripathi quoted the experts as saying. The experts were also critical of Sebi for not being alert and felt the market regulator had failed to take timely action to prevent the stock scam. Modern version to replace badla The Ministry of Finance has indicated to the Joint Parliamentary Committee (JPC) on the stock scam that it would work out a permanent and

refined carry-forward system, instead of the earlier badla system which has been banned since July 2. ''Finance Ministry officials informed us that they have held detailed discussions on the issue and that the badla system would be curbed in its original form and a more modern system would be ushered in,'' Chairman, JPC, Mr Prakash Mani Tripathi, said on Wednesday. Come july the concept of badla will no longer exist but will still remain, albeit through a different mode that is more regulated and transparent. The two most important aspects of the new market would be rolling settlement and derivatives. Rolling Settlement: With rolling settlement in place, investors cannot undertake intra-settlement speculation as they have to settle their account at the end of each trading day. This will invariably bring down speculation in the spot market. Therefore, liquidity dries up.

About primary market or new issue market


You are Here: Home > Financial management > About primary market or new issue market Companies issue securities from time to time to raise funds in order to meet their financial requirements for modernisation, expansions and diversification programmes. These securities are issued directly to the investors (both individuals as well as institutional) through the mechanism called primary market or new issue market. The primary market refers to the set-up which helps the industry to raise the funds by issuing different types of securities. This set-up consists of the type of securities available, financial institutions and the regulatory framework. The primary market discharges the important function of transfer of savings especially of the individuals to the companies, the mutual funds, and the public sector undertakings. Individuals or other investors with surplus money invest their savings in exchange for shares, debentures and other securities. In the primary market the new issue of securities are presented in the form of public issues, right issues or private placement. Firms that seek financing, exchange their financial liabilities, such as shares and debentures, in return for the money provided by the financial intermediaries or the investors directly. These firms then convert these funds into real capital such as plant and machinery etc. The structure of the capital market where the firms exchange their financial liabilities for longterm financing is called the primary market. The primary market has two distinguishing features :

It is the segment of the capital market where capital formation occurs; and In order to obtain required financing, new issues of shares, debentures securities are sold in the primary market. Subsequent trading in these securities occurs in other segment of the capital market, known as secondary market. The efficient operation of the primary market is made possible by the financial intermediaries and the financial institutions that arrange long-term financial transactions for their clients. The services they provide are so important that firms who seek long-term external financing, invariably turn to these firms in order to take advantage of their knowledge and ability to market the securities. The securities which are often resorted for raising funds are equity shares, preference shares, bonds, debentures, warrants, cumulative convertible preference shares, zero interest convertible debentures, etc. Public issues of securities may be made through (i) prospectus, (ii) offer for sale, (iii) book building process and (iv) private placement. The securities offered to public through a prospectus are directly subscribed by the investors. Wide publicity about the public offer is generally made by the company through different media.

Primary market
From Wikipedia, the free encyclopedia

This article does not cite any references or sources. Please help improve this article byadding citations to reliable sources. Unsourced material may be challenged and removed.(June 2011)

Financial markets

Public market

Exchange Securities

Bond market

Bond valuation Corporate bond Fixed income Government bond High-yield debt Municipal bond

Stock market

Common stock Preferred stock Registered share

Stock

Stock certificate Stock exchange Voting share

Derivatives market

Credit derivative Futures exchange Hybrid security Securitization

Over-the-counter

Forwards Options Spot market Swaps

Foreign exchange

Currency Exchange rate

Other markets

Commodity market Money market Reinsurance market Real estate market

Practical trading

Clearing house

Financial market participants Financial regulation

Finance series

Banks and banking Corporate finance Personal finance Public finance

The primary market is that part of the capital markets that deals with the issuance of new securities. Companies, governments or public sector institutions can obtain funding through the sale of a new stockor bond issue. This is typically done through a syndicate[disambiguation needed] of securities dealers. The process of selling new issues to investors is called underwriting. In the case of a new stock issue, this sale is an initial public offering (IPO). Dealers earn a commission that is built into the price of the security offering, though it can be found in the prospectus. Primary markets create long term instruments through which corporate entities borrow from capital market. Features of primary markets are:

This is the market for new long term equity capital. The primary market is the market where the securities are sold for the first time. Therefore it is also called the new issue market (NIM).

In a primary issue, the securities are issued by the company directly to investors. The company receives the money and issues new security certificates to the investors. Primary issues are used by companies for the purpose of setting up new business or for expanding or modernizing the existing business.

The primary market performs the crucial function of facilitating capital formation in the economy. The new issue market does not include certain other sources of new long term external finance, such as loans from financial institutions. Borrowers in the new issue market may be raising capital for converting private capital into public capital; this is known as "going public."

The financial assets sold can only be redeemed by the original holder.

Methods of issuing securities in the primary market are:

Public issuance, including initial public offering; Rights issue (for existing companies); Preferential issue.

[edit]See

also

Secondary market Third market Fourth market

Securities market
From Wikipedia, the free encyclopedia

This article does not cite any references or sources. Please help improve this article byadding citations to reliable sources. Unsourced material may be challenged and removed.(June 2012)

Securities market is an economic institute within which take place sale and purchase transactions of securities between subjects of economy on the base of demand and supply. Also we can say that securities market is a system of interconnection between all participants (professional and nonprofessional) that provides effective conditions: to buy and sell securities, and also

to attract new capital by means of issuance new security (securitization of debt), to transfer real asset into financial asset, to invest money for short or long term periods with the aim of deriving profit.

Contents
[hide]

1 Functions of securities market 2 Levels of securities market

o o o

2.1 Primary market 2.2 Secondary market 2.3 Over-the-counter market

3 Main financial instruments

o o o o

3.1 Promissory note 3.2 Certificate of deposit 3.3 Bond 3.4 Stocks (shares)

3.4.1 Common shares 3.4.2 Preferred stock

4 Professional participants

[edit]Functions

of securities market

The common market functions of securities market:

commercial function (to derive profit from operation on this market) Price determination (Demand and Supply balancing, the continuous process of prices movements guarantees to state correct price for each security (So, the market corrects mispriced securities)

Informative function (market provides all participants with market information about participants and traded instruments)

Regulation function (securities market creates the rules of trade, contention () regulation, priorities determination)

Specific functions of the securities market

Transfer of ownership (securities markets transfer existing stocks and bonds from owners who no longer desire to maintain their investments to buyers who wish to increase those specific investments. There is no net change in the number of securities in existence, for there is only a transfer of ownership. The role of securities market is to facilitate () this transfer of ownership. This transfer of securities is extremely important, for securities holders know that a secondary market exists in which they may sell their

securities holdings. The ease with which securities may be sold and converted into cash increases the willingness of people to hold stocks and bonds and thus increases the ability of firms to issue securities)

Insurance (hedging) of operations though securities market (options, futures, etc,..)

[edit]Levels

of securities market
market

[edit]Primary

The primary market is that part of the capital markets that deals with the issue of new securities. Companies, governments or public sector institutions can obtain funding through the sale of a new stock or bond issue. This is typically done through a syndicate of securities dealers. The process of selling new issues to investors is called underwriting. In the case of a new stock issue, this sale is apublic offering. Dealers earn a commission that is built into the price of the security offering, though it can be found in the prospectus. Primary markets creates long term instruments through which corporate entities borrow from capital market. Features of primary markets are:

This is the market for new long term equity capital. The primary market is the market where the securities are sold for the first time. Therefore it is also called the new issue market (NIM).

In a primary issue, the securities are issued by the company directly to investors. The company receives the money and issues new security certificates to the investors. Primary issues are used by companies for the purpose of setting up new business or for expanding or modernizing the existing business.

The primary market performs the crucial function of facilitating capital formation in the economy. The new issue market does not include certain other sources of new long term external finance, such as loans from financial institutions. Borrowers in the new issue market may be raising capital for converting private capital into public capital; this is known as "going public."

The financial assets sold can only be redeemed by the original holder.

Methods of issuing securities in the primary market are:

Public offerings, including initial public offerings; Rights issue (for existing companies); Preferential issue.

[edit]Secondary

market

The secondary market, also known as the aftermarket, is the financial market where previously issued securities and financial instruments such as stock, bonds, options, and futures are bought and sold. The term "secondary market" is also used to refer to the market for any used goods or assets, or an alternative use for an existing product or asset where the customer base is the second market (for example, corn has been

traditionally used primarily for food production and feedstock, but a "second" or "third" market has developed for use in ethanol production). Stock exchange and over the counter markets. With primary issuances of securities or financial instruments, or the primary market, investors purchase these securities directly from issuers such as corporations issuing shares in an IPO or private placement, or directly from the federal government in the case of treasuries. After the initial issuance, investors can purchase from other investors in the secondary market. The secondary market for a variety of assets can vary from loans to stocks, from fragmented to centralized, and from illiquid to very liquid. The major stock exchanges are the most visible example of liquid secondary markets - in this case, for stocks of publicly traded companies. Exchanges such as the New York Stock Exchange, Nasdaq and the American Stock Exchange provide a centralized, liquid secondary market for the investors who own stocks that trade on those exchanges. Most bonds and structured products trade over the counter, or by phoning the bond desk of ones broker-dealer. Loans sometimes trade online using a Loan Exchange.
[edit]Over-the-counter

market

Over-the-counter (OTC) or off-exchange trading is to trade financial instruments such as stocks, bonds, commodities or derivatives directly between two parties. It is contrasted with exchange trading, which occurs via facilities constructed for the purpose of trading (i.e., exchanges), such as futures exchanges or stock exchanges. In the U.S., over-the-counter trading in stock is carried out by market makers that make markets in OTCBB and Pink Sheets securities using inter-dealer quotation services such as Pink Quote (operated by Pink OTC Markets) and the OTC Bulletin Board (OTCBB). OTC stocks are not usually listed nor traded on any stock exchanges, though exchange listed stocks can be traded OTC on the third market. Although stocks quoted on the OTCBB must comply with United States Securities and Exchange Commission (SEC) reporting requirements, other OTC stocks, such as those stocks categorized as Pink Sheets securities, have no reporting requirements, while those stocks categorized as OTCQX have met alternative disclosure guidelines through Pink OTC Markets. An over-the-counter contract is a bilateral contract in which two parties agree on how a particular trade or agreement is to be settled in the future. It is usually from an investment bank to its clients directly. Forwards and swaps are prime examples of such contracts. It is mostly done via the computer or the telephone. For derivatives, these agreements are usually governed by an International Swaps and Derivatives Association agreement. This segment of the OTC market is occasionally referred to as the "Fourth Market." The NYMEX has created a clearing mechanism for a slate of commonly traded OTC energy derivatives which allows counterparties of many bilateral OTC transactions to mutually agree to transfer the trade to ClearPort, the exchange's clearing house, thus eliminating credit and performance risk of the initial OTC transaction counterparts.

[edit]Main

financial instruments

Bond, Promissory note, Cheque a security contains requirement to make full payment to the bearer of cheque, Certificate of deposit, Bill of Lading (a Bill of Lading is a document evidencing the receipt of goods for shipment issued by a person engaged in the business of transporting or forwarding goods." ), Stock.
[edit]Promissory

note

A promissory note, referred to as a note payable in accounting, or commonly as just a "note", is a contract where one party (the maker or issuer) makes an unconditional promise in writing to pay a sum of money to the other (the payee), either at a fixed or determinable future time or on demand of the payee, under specific terms. They differ from IOUs in that they contain a specific promise to pay, rather than simply acknowledging that a debt exists.
[edit]Certificate

of deposit

A certificate of deposit or CD is a time deposit, a financial product commonly offered to consumers by banks, thrift institutions, and credit unions. CDs are similar to savings accounts in that they are insured and thus virtually risk-free; they are "money in the bank" (CDs are insured by the FDIC for banks or by the NCUA for credit unions). They are different from savings accounts in that the CD has a specific, fixed term (often three months, six months, or one to five years), and, usually, a fixed interest rate. It is intended that the CD be held until maturity, at which time the money may be withdrawn together with the accrued interest.
[edit]Bond

Bond - an issued security establishing its holder's right to receive from the issuer of the bond, within the time period specified therein,

its nominal value and the interest fixed therein on this value or other property equivalent.

The bond may provide for other property rights of its holder, where this is not contrary to legislation.
[edit]Stocks

(shares)

[edit]Common shares

Common shares represent ownership in a company and a claim (dividends) on a portion of profits. Investors get one vote per share to elect the board members, who oversee the major decisions made by management.Over the long term, common stock, by means of capital growth, yields higher returns than almost every other investment. This higher return comes at a cost since common stocks entail the most risk. If a company goes bankrupt and liquidates, the common shareholders will not receive money until the creditors, bondholders, and preferred shareholders are paid.

[edit]Preferred stock

Preferred stock represents some degree of ownership in a company but usually doesn't come with the same voting rights. (This may vary depending on the company.) With preferred shares investors are usually guaranteed a fixed dividend forever. This is different than common stock, which has variable dividends that are never guaranteed. Another advantage is that in the event of liquidation preferred shareholders are paid off before the common shareholder (but still after debt holders). Preferred stock may also be callable, meaning that the company has the option to purchase the shares from shareholders at anytime for any reason (usually for a premium). Some people consider preferred stock to be more like debt than equity.
[edit]Professional

participants

Professional participants in the securities market - legal persons, including credit organizations, and also citizens registered as business persons who conduct the following types of activity:

Brokerage shall be deemed performance of civil-law transactions with securities as agent or commission agent acting under a contract of agency or commission, and also under a power (letter) of attorney for the performance of such transactions in the absence of indication of the powers of agent or commission agent in the contract.

Dealer activity shall be deemed performance of transactions in the purchase and sale of securities in one's own name and for one's own account through the public announcement of the prices of purchase and/or sale of certain securities, with an obligation of the purchase and/or sale of these securities at the prices announced by the person pursuing such activity.

Activity in the management of securities shall be deemed performance by a legal person or individual business person, in his own name, for a remuneration, during a stated period, of trust management of the following conveyed into his possession and belonging to another person, in the interests of this person or of third parties designated by this person:

1)securities; 2)monies intended for investment in securities; 3)monies and securities received in the process of securities management.

Clearing activity shall be deemed activity in determining mutual obligations (collection, collation and correction of information on security deals and

preparation of bookkeeping documents thereon) and in offsetting these obligations in deliveries of securities

Depositary activity shall be deemed the rendering of services in the safekeeping of certificates of securities and/or recording and transfer of rights to securities

Activity in the keeping of a register of owners of securities shall be deemed collection, fixing, processing, storage and provision of data constituting a system of keeping the register of security owners

Provision of services directly promoting conclusion of civil-law transactions with securities between participants in the securities market shall be deemed activity in the arrangement of trading on the securities market.

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