Definition: This is the market wherein the trading of securities is done.

Secondary market consists of both

equity as well as debt markets. Description: Securities issued by a company for the first time are offered
to the public in the primary market. Once the IPO is done and the stock is listed, they are traded in the
secondary market. The main difference between the two is that in the primary market, an investor gets
securities directly from the company through IPOs, while in the secondary market, one purchases securities
from other investors willing to sell the same. Equity shares, bonds, preference shares, treasury bills,
debentures, etc. are some of the key products available in a secondary market. SEBI is the regulator of the
same. The securities or the financial instruments are issued in the primary market and the investors purchase these
instruments directly from the IPO or through the Private Placement. Investors who have purchased the securities or
the financial instruments sell these in the secondary market to other investors. Various securities & financial
instruments that are traded in the stock market are;

 Equity Shares
 Preference Shares
 Bonus Shares
 Bonds
 Debentures
 Commercial Papers
 Treasury Bills

Beginning of Trading in India

For the first time the process of trading started in India in the year 1875 in Bombay which was then called as “Native
Share & Stock Broker’s Association” the total number of members were 318 and the amount of membership fees that
they paid was Rs.1 Since then this association has been growing and now it is called as the BSE or the Bombay Stock
Exchangewhich is known worldwide and is considered as a barometer to measure the industrial growth of the
developing India.

Functions of Secondary Market

 It’s a continuous market for securities

You can trade in shares without risk and enjoy continuous opportunities for trading.

o You can evaluate securities:

The prices of shares give a clear idea on the performance of Companies.

o You can mobilize savings:

Public savings are mobilized through mutual funds, REITs among others. Ordinary citizens get an opportunity to
invest small amounts in mutual funds.

o Stock markets encourage healthy speculation:

Stock markets offer opportunities for healthy speculation and the chance to reap high profits in the markets.

o Easy movement of funds:

 Stock exchanges like BSE and NSE help investors and Companies sell/buy shares.

o BSE and NSE protect investors:

SEBI regulates stock exchanges and protects the interests of investors.

o Secondary market offers liquidity:

Banks invest idle money in the secondary market and earn quick profits in a short time.

o Secondary markets are an economic barometer:

You get an idea on the economic conditions of the Nation based on the stock markets.

o Secondary market regulates Companies:

Stock markets force Companies to follow rules and regulations. It regulates the management of Companies.

o Stock markets attract foreign capital:

The stock markets attract foreign capital into India. FIIs and FPIs jump into Indian stock markets as they offer high
returns. The stock markets help strengthen the currency of the Nation.

Features of the Secondary Market:

Buyback of shares:

A buyback allows a Company to invest in its own shares. When a Company buys its own shares, it reduces the number
of outstanding shares in the market. This increases prices of shares of the Company.

Take a look at some of the prominent buybacks:

o TCS had gone for a Rs 16,000 Crore buyback.

o L&T had gone for Rs 9,000 Crore buyback at Rs 1500 a share.
o Kaveri Seeds had opted for Rs 200 Crore buyback.
o HCL Technologies had opted for Rs 4,000 Crore buyback.

Why Does a Company Opt for a Buyback?

o It helps increase the promoter holdings

o Increases EPS (Earnings per share)
o It writes off capital not represented by assets rationalizing capital structure. (Debt: Asset ratio is capital structure).
o To increase share prices.
o If there’s surplus cash not required by the business. In the past, Coal India and Infosys have sat on a huge cash pile.

Corporate Action:

Any action initiated by a Company which has a direct impact on shareholders. This could be declaration of dividend,
bonus shares or even a stock split.

What is a Stock Split?

In a stock split the number of shares of the Company increase, but the price comes down. This is because market
capitalization remains the same.

Take a look at the SBI stock split in 2014:

 The SBI board had fixed November 21st 2014 as the record date for the stock split in the ratio 1:10. The shares of face
value Rs 10, split into shares of Rs 1 each, in a 1:10 stock split. The stock prices split from Rs 2,913 a share to close
the day at Rs 297 a share.

Advantages of Secondary Market

o It mobilizes savings:

It encourages investors to invest money in the form of shares. Secondary markets provide a platform for easy trading
in shares, which helps convert shares to cash.

o Great investment opportunities for shareholders:

Shareholders enjoy a great opportunity to save and invest. There is capital appreciation as share value increases, also
an opportunity to get dividends on shares.

o You get investment advice:

There are stockbrokers and investment advisers who offer investment advice in secondary markets. They advice on
how to buy/sell shares and you don’t need to be an expert on stocks.

o Better Corporate Governance:

While managers are custodians of the Company, shareholders are the owners. The manager is accountable to the
shareholders of the Company. Management of listed Companies is always better than the unlisted, as shareholders
keep a close eye on the management of the Company.

Disadvantages of Secondary Market

o Secondary markets are volatile:

Investments in stocks are risky. Shares go up and down many times a day. You could earn high returns or lose a lot
of money.

o Brokerage and Commissions:

When you buy/sell shares, brokers earn commissions, eating up profits.

o Time consuming:

The process of investing in secondary markets may be time consuming.

What is Listing in Stock Exchange?

Listing is the process of registering a company in the stock exchange. It has been made compulsory by the SEBI
(Securities & Exchange Board of India) that a company which is intending to offer shares/securities through the
prospectus must be listed in the stock exchange. A company can be listed in one or more stock exchanges but once
the company is listed it has to follow all the rules and regulations that have been laid down by the stock exchange.
The company has to provide all the information that the stock exchange asks for during the procedure of listing. The
company concerned must apply in a prescribed form along with the various documents that are required by the
authorities of the stock exchange for example;

 Certified copies of Memorandum & Articles of Association

 Underwriting Agreements
 Particulars of the shares & debentures which are to be issued and their specimen copies
 Copies of balance sheets & audited accounts of the last 5 years
 Particulars of the dividends and interest paid in the previous years, regarding the capital structure & brief history of the
company, etc

The above are just some of the documents apart from these there are other documents and criteria and obligations
which are to be met by the company. The authorities scrutinize the documents and if they are satisfied then call upon
the company to sign the listing agreement and this listing agreement contains all the rules and regulations that the
company must follow failing which the stock exchange may cancel the listing or suspend the trading of shares &
securities of that particular company.

Advantages of Listing

 The investors have faith is the company is listed.

 When the company is listed its name is always in the news as and when there is discussion about the stock market hence it
gains free publicity or it gets marketed.
 If the company is listed then it becomes easy for it to borrow from financial institutions.
 On the basis of the value of its securities in the market it can lure many investors.
 The listing of a company becomes an advantage for the existing investors as the company has to follow the rules and
regulations which have been framed to protect the interest of the investors.

Disadvantages of Listing

 The true picture of the performance company cannot be decided lonely on the basis of the value of the securities in the stock
market.
 In the process of getting listed in stock market the company is forced to disclose the information which can be easily accessed
by the competitors.

In the secondary market even an individual person can trade but for an individual to trade in the market either he must
be a broker or else the individual must hire a broker. In the stock exchanges only the brokers are allowed to enter and
to do the trading.

Who is Broker?

Broker is a person who trades in the stock exchange. A broker can represent his clients or himself. A broker is ears &
eyes of the individual investor because it is the broker who knows in & out of the market and has the right knowledge
of the trading. A broker can always suggest his clients to invest in the right company as he has a fair idea of the way
in which the market is behaving. There are various brokerages in India some of them are Indiabulls, Sharekhan, India
Infoline etc. Brokers are part of the secondary market and are registered to the stock market. Anyone can become a
broker if he can pass through the written test and get through the interview conducted by SEBI. There are certain
criteria or obligations that he must fulfill to become a broker like he should be a citizen of India, he should not be
declared as bankrupt, he should not be having any criminal records, he must have completed 12 th class etc.

Types of Broker

There are various kinds of brokers in the market. Following are the variousekinds of brokers and their assistants:

Commission Brokers

These are the first kind and are the one who generally represent their clients. These brokers have large number of
clients from whom they receive the orders and accordingly execute the orders through the jobbers. The brokers charge
commission for every transaction they do on behalf of their clients.

Jobbers

A jobber is an independent & professional broker. The jobbers keep a close watch on the market and make a forecast
about the worth of the securities. A jobber purchases the securities and sell them at a higher price hence the main
motive of this kind of brokers is to earn profits. Usually when a broker has to either sell or purchase the securities they
 approach the jobbers and the jobbers give a two-way price or it is called as double-barelled price. The lower limit is
the price at which he is going to purchase the securities and the higher indicates the selling price. The margins whatever
the jobbers gain is called as the “jobber’s turn”.

Authorized Clerks

These are the assistants of the stock broker. A broker cannot be always present on the trading floor (it’s a place or the
floor where the actual trading takes place) so he appoints clerks who represent him and carry out the trading on his
behalf. According to the rules a stock broker can appoint only limited number of clerks and he will be solely
responsible for every transaction or the trading that is done by the clerk.

Sub-Broker

He acts as an agent for a broker. The sub-broker is not a part of the stock exchange but he is subject to all the rules &
regulations that are applicable for the member brokers. The sub-broker gets the clients to the broker. Based on the
business that he has brought fot the broker he is paid commission. The sub-brokers are called as “the Remisiers” in
BSE

Trading Process of Stock Exchange

Following are the different steps involved in the Trading process

Step 1: First step is that the investors who are interested in investing in the stock market choose a broker or a brokerage
firm who can represent them in the stock market.

Step 2: The clients place the order with their broker. In this world of technology the orders are usually placed over
the phone calls. The clients call up their brokers and tell him to purchase or sell the shares based on their interest or
some of the clients ask the suggestion from the broker and if convinced go ahead with that.

Step 3: The broker based on the orders of the clients approaches the jobbers and fixes the price.

Step 4: Once the transaction has been the details are taken down in a small rough book.

Step 5: Once the transaction has taken place the broker /authorized clerk prepares a contract note it is a written
agreement which contains all the details regarding the selling/buying of the shares and the brokerage that is charged.
This agreement is sent to the client also.

Step 6: Finally the shares are delivered to the client along with the transfer deed which is duly signed by the transferor
as it has been a rule to have a Demat account so, now the shares are directly transferred to the account and there is no
need of signing the transfer deed.

Dematerialization

Dematerialization is nothing but the physical form of share certificates are converted to the electronic form and are
stored with the depository participant. A depository holds all the securities of its clients in the electronic format and it
facilitates easy transfer of the ownership of the certificates when the trading is done. A depository participant is an
intermediary and it must be registered with SEBI to offer the depository related services.

See Also: How to Dematerialize Physical Shares?

Process of Dematerialization

The process is as follows;

 An individual investor who owns the shares approaches a depository participant for opening a demat account.
 After completing filling up of all the required forms he submits the forms along with the shares in the physical form to
depository participant.
 The depository participant will send the application forms along with the shares to the registrar and will also intimate NSDL.
 The registrar checks the application form and the authenticity of the shares and then sends the confirmation the Demat
account has been created.

Advantages of Dematerialization

With the introduction of this technology of dematerialization of the shares it has paved way for easy trading. Some of
the advantages are;

 Filling up of transfer deeds is not necessary

 No need of carrying the share certificates
 No scope for forgery and theft.
 Easy transfer of ownership
 Fast payment on selling the shares

It has been made compulsory by SEBI that all the investors who are interested in trading must and should have the
demat account.

Demutualisation is the process through which any member-owned organisation becomes a shareholder-
owned company. this company could either be listed on a stock exchange or closely held by its shareholders.
originally, the term applied specifically to insurance companies converting into shareholder-owned entities
from being mutually owned by policy holders.

what is the importance of demutualisation in the indian context? in india, demutualisation relates more to
the stock exchanges than to insurance companies. most of the indian stock exchanges, for that matter world
over, are non-profit and mutual or co-operative organisations. in simple terms, the brokers who trade on
them collectively own and run them. since the objective of a stock exchange and those of the brokers trading
on them are different, the vesting of ownership and managerial rights with the brokers can often lead to a
conflict of interests. and in most cases, it is the interest of brokers that is preserved over the interest of wider
investing public. in fact, in recent times a number of instances of this have been unearthed at the indian
stock exchanges. demutualisation is increasingly being suggested as a measure to check this as it leads to
the separation of the ownership and trading rights of the brokers.

what are the structural changes in a stock exchange on demutualisation? through demutualisation, a stock
exchange becomes a corporate entity with its own objectives. moreover, it transforms from a non-profit
organisation. it becomes a profit-making company like any other corporate entity.

how is demutualisation of a stock exchange achieved? a stock exchange can demutualise in many ways. one
common way is to split the membership into two parts — trading rights and ownership — in a desired ratio.
the ownership right is then further split into a number of shares the total value of which would be equal to
net assets of the exchange at book value. the shares would then be distributed to the members of the
exchange and could even be listed on that exchange without making a public offer. this means that while
retaining his trading rights, a broker would be able to sell his ownership rights through sale of his shares.
this is how demutualisation leads to separation of ownership and trading rights.

what are the benefits of demutualisation for exchange users? the most obvious benefit of demutualisation
is that it leads to the separation of the ownership and control of stock exchanges from trading rights of its
members, which eliminates the conflict of interest between exchange and broker members. this reduces the
chances of brokers using stock exchanges for personal gains.

what are the gains for the exchanges? for the stock exchanges, demutualisation means access to more
resources, which has become very important of late given that they have to invest massively in technology
to offer contemporary trading platforms. also, with globalisation the need for entering into a strategic
alliance with other exchanges or acquiring other exchanges for growth or even survival has become
important. a corporatised structure is best suited for this as it facilitates faster decision making and easy
access to finance. from the regulatory perspective too demutualisation is beneficial as it makes the
operations of the stock exchange more transparent. for the members too, demutualisation makes sense as
it makes their asset (ownership in the exchange) liquid, which the member can easily sell. if not, since on
demutualisation a stock exchange becomes a profit-making entity, members get a share of the profits made
by the exchange through dividends. meanwhile, their trading rights remain intact.

what is the global experience with demutualisation of stock exchanges? recently, a number of stock
exchanges have demutualised and become corporate entities. leading among these are the nasdaq, the
australian stock exchange (asx), the hong kong stock exchange, the singapore stock exchange, the chicago
mercantile exchange, and the new york mercantile exchange. last year itself, the london stock exchange and
tokyo stock exchange took on a corporate structure by demutualsing. in total, about 17 stock exchanges have
demutualised and another 15 are in the process of demutualising.

Demutualization is a complex process that involves transitioning a company’s financial structuring

from a mutual company structure to a shareholder supported structure. A mutual company (not
to be confused with a mutual fund) is a company created to provide specific services that are
supported through investment by its members and also utilized by its members as customers.
Mutual company structures are often utilized by insurance companies, savings and loan
associations and banking trusts. Credit unions are also typically structured as a mutual company.

The first life insurance company in the United States was structured as a mutual company and
called the Presbyterian Minister’s Fund. Mutual insurance companies have long since been
known for collecting policyholder premiums from their members and spreading risk and profits
through various mechanisms. Membership benefits of mutual companies are primarily focused in
the rates and services they receive and the distributions they are paid as member clients. Over
the years, numerous court cases and regulatory legislations have been debated involving the
rights and ownership conversion of members in a demutualization.

Some of the industry’s most noteworthy demutualizations occurred in 2000 and 2001 with the
demutualization of Prudential Insurance Company, Sun Life Assurance Company, Phoenix Home
Life Mutual Insurance Company, Principal Life Insurance Company and the Metropolitan Life
Insurance Company (MetLife).

The Demutualization Process

In a demutualization a mutual company chooses to change its corporate structure to a stock
company. Members can receive a structured compensation and/or ownership conversion rights
in the transition. After demutualization the capital raising ownership focus shifts to the company’s
new shareholders.

There are a few methods a demutualization process may follow. In a full demutualization, the
company holds an initial public offering whereby its stock is auctioned to shareholders and shares
become traded on a public market exchange. The mutual structure is nullified and previous
members can buy shares in the company through the IPO. In a full demutualization no shares are
typically granted to previous members.

Other methods of demutualization may also be followed including a sponsored demutualization.

In a sponsored demutualization, the company often grants various forms of structured stock
options to the members for conversion during the company’s initial public offering. In a sponsored
demutualization, members typically receive greater compensation for their previous membership
and usually do not have to invest personal capital in the newly issued shares, however they may
buy additional shares if they choose.

When a demutualization occurs, members are typically compensated in some way, often with a
closing distribution commensurate upon the terms guided by the individual company’s
demutualization. A demutualization can include the granting of shares to previous members in
the new IPO but it is not required. Products and services contracted by members typically
continue to be held with the company however terms of customers’ products and services may
change with the demutualization. Demutualization is a complex process that involves transitioning
a company’s financial structuring from a mutual company structure to a shareholder supported
structure. A mutual company (not to be confused with a mutual fund) is a company created to
provide specific services that are supported through investment by its members and also utilized
by its members as customers. Mutual company structures are often utilized by insurance
companies, savings and loan associations and banking trusts. Credit unions are also typically
structured as a mutual company. The first life insurance company in the United States was
structured as a mutual company and called the Presbyterian Minister’s Fund. Mutual insurance
companies have long since been known for collecting policyholder premiums from their members
and spreading risk and profits through various mechanisms. Membership benefits of mutual
companies are primarily focused in the rates and services they receive and the distributions they
are paid as member clients. Over the years, numerous court cases and regulatory legislations have
been debated involving the rights and ownership conversion of members in a demutualization.
Some of the industry’s most noteworthy demutualizations occurred in 2000 and 2001 with the
demutualization of Prudential Insurance Company, Sun Life Assurance Company, Phoenix Home
Life Mutual Insurance Company, Principal Life Insurance Company and the Metropolitan Life
Insurance Company (MetLife).

In a demutualization a mutual company chooses to change its corporate structure to a stock

company. Members can receive a structured compensation and/or ownership conversion rights in
the transition. After demutualization the capital raising ownership focus shifts to the company’s
new shareholders. There are a few methods a demutualization process may follow. In a full
demutualization, the company holds an initial public offering whereby its stock is auctioned to
shareholders and shares become traded on a public market exchange. The mutual structure is
nullified and previous members can buy shares in the company through the IPO. In a full
demutualization no shares are typically granted to previous members. Other methods of
demutualization may also be followed including a sponsored demutualization. In a sponsored
demutualization, the company often grants various forms of structured stock options to the
members for conversion during the company’s initial public offering. In a sponsored
demutualization, members typically receive greater compensation for their previous membership
and usually do not have to invest personal capital in the newly issued shares, however they may
buy additional shares if they choose. When a demutualization occurs, members are typically
compensated in some way, often with a closing distribution commensurate upon the terms
guided by the individual company’s demutualization. A demutualization can include the granting
of shares to previous members in the new IPO but it is not required. Products and services
contracted by members typically continue to be held with the company however terms of
customers’ products and services may change with the demutualization. The much-awaited
demutualisation of Bombay Stock Exchange (BSE) was completed today after Asia's oldest
bourse sold its 51 per cent stake to 21 investors, including high net worth individuals Kris
Gopalakrishnan and N S Raghavan of Infosys Technologies.

The BSE shares were sold at Rs 5,200 apiece, the same price at which it issued shares to
Germany's Deutsche Boerse and Singapore Exchange Ltd (SGX), valuing the exchange at nearly
$1 billion.Earlier, National Stock Exchange had sold 26 per cent to a group of foreign investors,
including New York Stock Exchange (NYSE), valuing the country's biggest bourse in terms of
trading volumes at $2.3 billion. The 800-odd brokers in BSE sold nearly half their shareholding,
constituting 41 per cent equity stake in the exchange. This would mean these members have
collectively received Rs 1,600 crore through the stake sale. The list of investors includes six
foreign entities, including Deutsche Boerse and SGX, which bought 5 per cent each recently,
paying Rs 189 crore each. The other foreign investors in the deal are US private equity fund
Atticus Mauritius Ltd and Caldwell Asset Management. Both are buying 4 per cent in the
exchange. The other two foreign investors are Dubai Financial and Katrel Investment Ltd,
Cyprus. Together, these four overseas investors have picked up 16 per cent in BSE.

What is an Odd Lot?

An odd lot is an order amount for a security that is less than the normal unit of trading for that
particular asset. Odd lots are considered to be anything less than the standard 100 shares for
stocks. Trading commissions for odd lots are generally higher on a percentage basis than those
for standard lots, since most brokerage firms have a fixed minimum commission level for
undertaking such transactions. Odd lots may inadvertently arise in an investor's portfolio
through reverse splits or dividend reinvestment plans. For example, a one-for-eight reverse split
of a security, of which the investor holds 200 shares, will result in a post-split amount of 25
shares. While trading commissions for odd lots may still be higher than for standard lots on a
percentage basis, the popularity of online trading platforms and the consequent plunge in
brokerage commissions means that it is no longer as difficult or expensive for investors to
dispose of odd lots as it used to be in the past.

An odd lot refers to an order amount for a security that is less than the normal unit of trading for
an asset. Typically this refers to anything less than the standard 100 shares for stocks.

An odd lot order generally costs more due to higher commission levels.

What is Auction Market?

An auction is a mechanism where exchange auctions the investor’s stock holding when the
person had sold the stock but is unable to deliver it within a stipulated time period. This
mechanism is basically a kind of penalty apart from the fees for the auction. Hence, keep a
precaution that your stock doesn’t go into the auction process. It takes place mostly due to an
investor’s carelessness. Whenever you sell shares, there’s always a buyer on the other side. So
when you sell shares and cannot deliver it back to the buyer for which he had already paid
money, in such a scenario, the exchange calls for an auction. So your broker will try to purchase
the shares in a buy-in auction market on T+2 day and the settlement of auction shall be done on
T+3 day (holidays are not included). In case of a successful auction, the client in default (i.e.
you) will have to pay the actual auction price + Brokerage + Penalty (this depends on your
broker).

What is Auction Pricing?

The auction pricing depends on the stock price on the auction day. The minimum or lowest
auction price will be 20% below the closing price of the day before the day of the auction.
Suppose if it is lower, you might gain but this difference goes to the Investor Protection Fund
(IPF) and it is not given to you (some broker may pass the gain to you). But say if it is higher,
you need to pay the difference. The close out on the auction day (i.e. T+2 day) will basically be
the highest price prevailing in the market till the auction day from the day of trading or 20%
above the closing price on the auction day (whichever is higher). You can gain an in-depth
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If the auction is not successful, no one is ready to sell in the auction (generally happens when the
stock hits upper circuit), the sale transaction is cancelled by the exchange and the defaulting
member has to pay the highest price prevailing from the day of trading (T) up to a day prior to
the auction day OR 20% above the official closing price on the day prior to auction day,
whichever is higher. The buyer of those shares gets a full refund.

Auction Timing and Participants: The auction process is conducted between 2-2:45 pm on a
daily basis. It can be participated only by the member broker of the exchange and sell shares
which are short delivered. Example Let’s understand the concept of auction with the help of a
practical example. On Monday, Bittu short sold 1 share of Apollo Hospitals @ Rs 1080. On
Wednesday (i.e. T+2 day), on behalf of Bittu, his broker is required to deliver the stock to the
exchange. Say he defaults on delivery. On this day, the exchange notices that these shares had
not been delivered by the broker and it accordingly blocks a sum of money from the broker’s
account which is termed as Valuation Debit. The valuation price for securities which were not
delivered on the settlement day is the closing price of such securities on the immediate trading
day (T+1) preceding the pay-in day. Assuming the closing price of Apollo Hospital on T+1 day
stands at Rs 1090, the exchange will block sum equal to Rs 1090 from the broker’s account. The
exchange conducts an auction on T+2 day and on behalf of the defaulting seller, it purchases
back the stock from the Auction Participant. The exchange actually delivers the shares back to
the actual buyer back on T+3. Say the stock was bought back in the auction market at Rs 1110.
In that case, an additional sum of Rs 20 will be blocked by the exchange (which is the difference
between the Auction purchase price @ Rs 1110 and Valuation Debit of Rs 1090).

However, if the stock would have been purchased in the auction market at Rs 930, so the
difference amount (i.e. Rs 1090-930) will be transferred to the Investor Protection Fund (IPF).

But in case, there isn’t any seller in the auction market, the exchange conducts the closeout in the
following manner.

Closeout will be at the highest price prevailing in the NSE from the day of trading till the auction
day or 20% above the official closing price on the auction day, whichever is higher.

Now suppose, the highest price from the day of trading to the auction day stands at Rs 1120. Say
the closing price on T+2 day (i.e. auction day) was Rs 1110. So the closeout will be higher of Rs
1120 or Rs 1332 (1110 *120%) i.e. Rs 1332 (closeout price). In this case, the additional sum of
Rs 42 will be blocked by the exchange.