Shares Listing Procedure in India

Acompany has to list its securities on the stock exchange for trading in the stock market. Listing of
securities means a company is registered on the stock exchange.

The company has to fulfil the conditions mentioned in Companies Act.

To list its securities in stock exchange, company has to offer its securities to the public for subscription.

A company must have minimum equity capital of Rs. 5 crores and 60% of this amount are offered to the
public, for Shares Listing on the stock exchange.

Conditions for Shares Listing

According to Regulation 4(2) of SEBI[1] (Issue of Capital and Disclosure Requirements) Regulations 2009,
no issuer shall make a public issue or rights issue of securities unless they make an application to one or
more recognized stock exchanges and have chosen one of them as a designated stock exchange.

In the case of Initial Public Offer, it is required for the issuer to make an application for Shares Listing in at
least one recognized stock exchange having nationwide trading terminals.

The company has to follow specified conditions before Shares listing in stock exchange:

 Shares of a company shall be offered to the public through the prospectus, and 25% of securities
must be offered.
 Date of opening of subscription, receipt of the application and other details should be mentioned in
the prospectus.
 The capital structure of the company should be wide and the securities of the company should be in
public interest.
 The requirement is Rs. 3 Crores out of which 1.8 Crore must be offered to the public.
 There is a requirement of at least 5 public shareholders in respect of every Rs. 1 Lakh of fresh issue
of capital and 10 shareholders for every Rs.1 lakh of the offer of existing capital.
 In the case of excess application money, the company has to pay interest within the range of 4% to
15%, in case there is a delay in the refund then such delay should not be more than 10 weeks from the date
of closure of subscription list.
 The company with paid-up share capital of more than Rs. 5 crores should get itself registered in the
recognized stock exchange and compulsorily on the regional stock exchange.
 The auditor or secretary of the company has to declare that share certificate has been stamped for
listing so that shares belonging to promoter’s quota cannot be sold or transferred for 5 years.

An article of Association must contain the following provisions:

1. A common form for transfer shall be used;

2. Fully paid shares shall be utilized;
3. No lien on fully paid shares;
4. Calls paid in advance will not carry the right to dividend and cannot be forfeited before claims
become time-barred.
5. Only after the sanction by the general meeting, option to call off shares shall be given;

 Letter of allotment, Letter of regret and letter of a right shall be issued.

 Receipts for all securities deposited either by way of registration or split.
 Consolidation and renewal certificates will be issued for a certificate of the division, letter of
allotment, transfer, and letter of rights, etc.
 The company has to notify stock exchange regarding the board meeting, change in the composition
of a board of directors and the case of the new issue of securities in place of a reissue of forfeited shares.
 Due notice should be given to stock exchange, for closing transfer books for a declaration of
dividend, rights issue or bonus issue.
 After the annual general meeting, the annual return is required to be filed.
 The company is required to comply with the conditions imposed by the stock exchange for the listing
of security.

Different Types of Listing of Securities

 Initial Listing

In case shares of the company are listed for the first time in the stock exchange.

 Public issue

The company who has listed its shares on a stock market comes out with a public issue.

 Right Issue

The company who has listed its shares in a stock exchange issues shares to its existing shareholders.

 Bonus Shares

When a listed company issue bonus shares to its existing shareholders for capitalizing its profits.

 Listing for merger or amalgamation

The amalgamated company issues new shares to the shareholders of the merged company, and these new
shares are listed.

Documents for Shares Listing

Public Company has to submit the following documents to Shares Listing in stock exchange:

 Certified copy of Memorandum & Article of Association;

 Prospectus & agreement with underwriters;
 Details of Capital Structure;
 Copies of an advertisement offering securities during the last 5 years;
 Copies of financial statement & auditor’s report for the last 5 years;
 Copy of shares & debentures, letter of allotment and letter of regret;
 Details of the company since incorporation including changes in the capital structure, borrowings,
etc.;
 Details of shares or debentures issued for consideration other than cash;
 A statement defining the distribution of shares and other details related to the commission,
brokerage, discounts, or terms related to issue of shares;
 Agreement with a financial institution, if any;
 Details of shares forfeited;
 Details of securities about which permission to deal with are applied for;
 A copy of consent from SEBI.

Procedure for Shares Listing

The application is made to the listing committee of the stock exchange by the company, and then the listing
committee will scrutinize the application form of the company.

Stock Exchange will ensure the following:

 Whether the financial position of the company is sound or not;

 Solvency & liquidity positions of the company;

In case the application for listing is accepted then the listing company will have to execute a listing
agreement with the stock exchange.

Obligations required to be followed by the company:

 It is required to treat all application with equal fairness.

 In the case of oversubscription, the process of allotment will be decided in consultation with stock
exchanges.

Conclusion

In corporate finance, shares listing means company’s share are listed on the list of stock. There are some
stock exchanges that allow shares of foreign company to be listed and allow dual listing also. In case you
need more information on listing of shares, contact Enterslice.

What is Equity Financing?

Equity financing refers to the sale of company shares in order to raise capital. Investors who purchase the
shares are also purchasing ownership rights to the company. Equity financing can refer to the sale of all
equity instruments, such as common stock, preferred shares, share warrants, etc.

Equity financing is especially important during a company’s startup stage to finance plant assets and
initial operating expenses. Investors make gains by receiving dividends or when their shares increase in
price.

Major Sources of Equity Financing

When a company is still private, equity financing can be raised from angel investors, crowdfunding
platforms, venture capital firms, or corporate investors. Ultimately, shares can be sold to the public in the
form of an IPO.

1. Angel investors

Angel investors are wealthy individuals who purchase stakes in businesses that they believe possess the
potential to generate higher returns in the future. The individuals usually bring their business skills,
experience, and connections to the table, which helps the company in the long term.

2. Crowdfunding platforms

Crowdfunding platforms allow for a number of people in the public to invest in the company in small
amounts. Members of the public decide to invest in the companies because they believe in their ideas and
hope to earn their money back with returns in the future. The contributions from the public are summed up
to reach a target total.

3. Venture capital firms

Venture capital firms are a group of investors who invest in businesses they think will grow at a rapid pace
and will appear on stock exchanges in the future. They invest a larger sum of money into businesses and
receive a larger stake in the company compared to angel investors. The method is also referred to as private
equity financing.

4. Corporate investors

Corporate investors are large companies that invest in private companies to provide them with the necessary
funding. The investment is usually created to establish a strategic partnership between the two businesses.

5. Initial public offerings (IPOs)

Companies that are more well-established can raise funding with an initial public offering (IPO). The IPO
allows companies to raise funds by offering its shares to the public for trading in the capital markets.

 
 

Advantages of Equity Financing

1. Alternative funding source

The main advantage of equity financing is that it offers companies an alternative funding source to debt.
Startups that may not qualify for large bank loans can acquire funding from angel investors, venture
capitalists, or crowdfunding platforms to cover their costs. In this case, equity financing is viewed as less
risky than debt financing because the company does not have to pay back its shareholders.

Investors typically focus on the long term without expecting an immediate return on their investment. It
allows the company to reinvest the cash flow from its operations to grow the business rather than focusing
on debt repayment and interest.

2. Access to business contacts, management expertise, and other sources of capital

Equity financing also provides certain advantages to company management. Some investors wish to be
involved in company operations and are personally motivated to contribute to a company’s growth.

Their successful backgrounds allow them to provide invaluable assistance in the form of business contacts,
management expertise, and access to other sources of capital. Many angel investors or venture capitalists
will assist companies in this manner. It is crucial in the startup period of a company.

Disadvantages of Equity Financing

1. Dilution of ownership and operational control

The main disadvantage to equity financing is that company owners must give up a portion of their
ownership and dilute their control. If the company becomes profitable and successful in the future, a certain
percentage of company profits must also be given to shareholders in the form of dividends.

Many venture capitalists request an equity stake of 30%-50%, especially for startups that lack a strong
financial background. Many company founders and owners are unwilling to dilute such an amount of their
corporate power, which limits their options for equity financing.

2. Lack of tax shields

Compared to debt, equity investments offer no tax shield. Dividends distributed to shareholders are not a
tax-deductible expense, whereas interest payments are eligible for tax benefits. It adds to the cost of equity
financing.

In the long term, equity financing is considered to be a more costly form of financing than debt. It is because
investors require a higher rate of return than lenders. Investors incur a high risk when funding a company,
and therefore expect a higher return.

Capital Raising Process – An Overview

This article is intended to provide readers with a deeper understanding of how the capital raising process
works and happens in the industry today. For more information on capital raising and different types of
commitments made by the underwriter, please see our underwriting overview.

Book Building Process

During the second phase of underwriting advisory services, investment bankers must estimate the expected
investor demand. This includes an evaluation of current market conditions, investor appetite and experience,
news flow, and benchmark offerings. Based on all these conditions, investment bankers or underwriters will
draft a prospectus with a price range that they believe is reflective of expected investor demand. Then,
combined with institutional investors’ commitment, the underwriter will narrow the offering to a firmer
price.

As investment bankers receive orders at certain prices from institutional investors, they create a list of the
orders, called the book of demand. From this list, investment bankers will justify and set a clearing price to
ensure the entire offering is sold. Finally, the allocation of stocks or bonds will occur based on the
subscription of the offering. In the case of an oversubscribed book, some investors may not receive the full
requested order.

 
 

Roadshow for the Capital Raising Process

The roadshow is often included as a part of the capital raising process. This is when the management of the
company going public goes on the road with investment bankers to meet institutional investors who are –
hopefully – going to be investing in their company. The roadshow is a great opportunity for management to
convince investors of the strength of their business during the capital raising process.

These are some critical factors for a successful roadshow:

1. Understanding the management structure, governance, and quality

Investors are adamant that management structure and governance must be conducive in order to create
profitable returns. For a successful roadshow, management must convey efficient oversight controls that
exhibit streamlined business procedures and good governance.

2. Understanding key risks

Although risks aren’t positive, management must highlight and be upfront about the risks involved. Failure
to report any key risks will only portray their inability to identify risks, hence demonstrating bad
management. However, management should emphasize their hedging and risk management controls in place
to address and mitigate the risks involved in carrying out their business.
3. Informing  about tactical and long-term strategies

Informing investors about the management’s tactical and strategic plans is crucial for investors to understand
the company’s future growth trajectory. Will management be able to create sustainable growth? What are
the growth strategies? Are they aggressive or conservative?

4. Identifying key competitors

Again, although competition isn’t a positive factor, management must clearly address the issue with
investors. When discussing key competitors, management should lead the conversation to how their
competitive advantage is, or will be, more superior than that of their competitors.

5. Outlining the funding purpose and requirements

Why does the management need more cash? How, specifically, will the money be used?

6. A thorough analysis of the industry/sector

Investors want to not only understand this company, but also the industry. Is it an emerging market? What is
this company’s projected growth compared to that of the overall industry? Are the barriers to entry high or
low?

Pricing

Even though investment bankers devote substantial amounts of thought and time in pricing the issue, it is
extremely challenging to predict the “right” price. Here are some key issues to consider in pricing.

1. Price stability

After the offering is completed, investors do not want a lot of volatility. High levels of volatility will
represent that the security was valued incorrectly or unreflective of the market’s demand or intrinsic value.

2. Buoyant aftermarket

If there is to be any price volatility after the issue, hopefully, it will be to the upside. A strong post-issue
performance indicates an underpriced offering.

3. Depth of investor base

If an offering attracts only a few highly concentrated investors, the probability of price volatility will be
high. The deeper the investor base, the larger the investor pool, the more stable prices are likely to be.

4. Access to market

 
 

Pricing Tradeoff

Choosing the “right” price requires a tradeoff between achieving a strong aftermarket price performance and
underpricing. Therefore, an investment banker should price the offering just low enough for a strong
aftermarket performance, but not so low that the issuer feels the offering is substantially undervalued.

Costs of Underpricing

Underpricing an issue reduces the risk of an equity overhang and ensures a buoyant aftermarket. Then why
wouldn’t underwriters want to underprice every time? In short, underpricing an offering is simply a transfer
of surplus from the issuer to investors. The issuer will incur an opportunity cost from selling below its value,
while investors will gain from buying an undervalued offering. As banks are hired by the issuers, the
underwriters must in good faith make the best decisions and returns for the issuer by correctly balancing the
tradeoff.

 
 

IPO Pricing

In order to price an IPO, banks must first determine the full value of the company. Valuation is done by a
combination of Discounted Cash Flow (DCF), comparable companies, and precedent transactions analysis.
For more information on business valuation and financial modeling, please see our financial modeling
guide and financial modeling course.

Once investment bankers determine the value of the business through these financial models, they deduct an
IPO discount. Hence, in IPOs, there is usually a discount on the intrinsic or full value of the business to price
the offering. The full value minus the IPO discount gives a price range that investment bankers believe will
attract institutional investors. Typically, 10%-15% is a normal range for the discount.

However, exceptions always exist. In the case of a heavily oversubscribed offering, the excess demand may
offset the IPO discount. On the other hand, if the demand is lower than expected, it may be re-priced below
the expected price range.

 
 Underwriting
Overview of capital raising process
Home › Resources › Knowledge › Finance › Underwriting

What is Underwriting?

In investment banking, underwriting is the process where a bank raises capital for a client
(corporation, institution, or government) from investors in the form of equity or debt
securities.
This article aims to provide readers with a better understanding of the capital raising or
underwriting process in corporate finance from an investment banker’s perspective. There are
two main functions in corporate finance: M&A Advisory and Underwriting.

M&A advisory includes assisting in negotiating, structuring, and performing a valuation of a

merger or an acquisition associated with a deal. This service is usually provided by the
advisory side of an investment bank, transaction advisor, or in-house by the corporate
development group.

On the underwriting side, the process includes the sale of stocks or bonds to investors in the
form of Initial Public Offerings (IPOs) or follow-on offerings.

In corporate finance, jobs exist on the sell side with investment banks providing M&A or
capital raising advisory services, or on the corporate side with in-house corporate
development groups. Finally, jobs also exist in public accounting firms providing support
services for these types of transactions.

To learn more about each job in detail, see our Career Map.

Underwriting Advisory Services

There are three main phases of underwriting advisory services: planning, assessing the timing
and demand for the issue, and issue structure, respectively.

1. Planning

It is important to identify the investor themes in the planning phase, understand the rationale
for the investment, and get a preliminary view of investor demand or interest in this type of
offering.
2. Timing and Demand

The timing and demand of an offering are crucial to a successful capital raising. Here are
some factors that influence the assessment of the timing and demand of an offering.

 Current market condition: Is it a hot or a cold issue market?

 Current investor appetite: What is the current investor risk profile and appetite? Is
it aggressive or conservative? Are investors risk preferring, neutral, or averse?
 Investor experience: What are the investors’ experiences? Are investors
experienced in this field or market?
 Precedents and benchmark offerings: Has a similar company (based on size,
industry, and geographical location) issued an IPO in the past? What are some other
companies that you can benchmark for an IPO?
 Current news flow: What is the current news flow on the company? Is it a positive
or a negative flow?

3. Issue Structure

Deciding the structure of an offering is the final phase of underwriting advisory services.
Here are some factors that influence the issue structure:

 Is it going to be a domestic or an international issue? Are the investor demands

located domestically or overseas? Would investors from other countries be interested
in this offering?
 Is the focus on institutional or retail investors?
 How will the sale occur?

 
 

Types of Underwriting Commitment

When an underwriter enters into a contract with a company to help raise capital, there are
three main types of commitments made by the investment bank: firm commitment, best
efforts, and all-or-none.

1. Firm Commitment

In the case of a firm commitment, the underwriter agrees to buy the entire issue at a certain
price. If the underwriter fails to sell the entire issue, the underwriter must take full financial
responsibility for any unsold shares.

2. Best Efforts

The best efforts basis is the most common form of commitment out of the three listed.
Although the underwriter commits in good faith to sell as much of the issue at the agreed
price as possible, there is no financial or legal responsibility imposed on the underwriter for
any unsold shares or deal performance.

3. All-or-none
 Finally, in an all-or-none commitment, unless the entire issue is sold at the offering price, the
deal is voided, and the underwriter will not receive any compensation.

Summary of the underwriting process

There are three main stages in the underwriting or capital raising process: planning, assessing
the timing and demand, and issue structure. The planning stage involves the identification of
investor themes, understanding of investment rationale and an estimate of expected investor
demand or interest. In the timing and demand phase, the underwriter must evaluate the
current market conditions, investor appetite, investor experience, precedents, and benchmark
offerings, and current news flow to determine the best timing and demand of an offering.
Finally, the underwriter must decide the issue structure based on the focus on either
institutional or retail investors and a domestic versus an international issue.

There are three main types of commitment by the underwriter: firm commitment, best efforts,
and all-or-none. In a firm commitment, the underwriter fully commits to the offering by
buying the entire issue and taking financial responsibilities for any unsold shares. The most
common form of commitment – best efforts or marketed deal – imposes no financial
responsibility on the underwriter, regardless of the performance of the deal. The underwriter
is not liable for any unsold shares. Finally, in an all-or-none commitment, the underwriter
will not be compensated at all unless the entire issue is sold at the offering price.

Angel Investor
The holy grail for startups
Home › Resources › Knowledge › Finance › Angel Investor

What is an Angel Investor?

An angel investor is a person or company that provides capital for start-up businesses in

exchange for ownership equity or convertible debt. They may provide a one-time investment
or an ongoing capital injection to help the business move through the difficult early stages.
Unlike banking institutions that invest in already profitable businesses, angel investors invest
in entrepreneurs taking their first steps in business. In most cases, they play an active role in
the management of the new business as a way of protecting their investment and helping the
owner build a thriving business. Also, some passive investors invest through a fund or Private
Placement Memorandum and are not directly involved in the business.
 

There are three ways in which an angel investor can provide funds to a start-up business. The
most common way is to offer the business a loan that can be converted into an equity position
in the company once the company has taken off. In such a situation, the angel investor will
require a 20%-30% equity interest that gives them a voice on the company’s board. The
second option is to provide funds through a convertible preferred stock option and still be a
member of the company board. The investor then defers the dividend payment for the stocks
until a future date. The third option is to get an equity position directly, such as a 20%-30%
stake in the company. To safeguard his or her interest, the investor may appoint one or two
associates to help in managing the business.

Origin of the Angel Investor

The term “Angel” originated from the Broadway theater, where affluent individuals provided
money for theatrical productions. The wealthy individuals provided funds that were paid back
in full plus interest once the productions started generating revenue. The founder of the
Centre for Venture Research and also a professor at the University of New Hampshire,
William Wetzel, coined the term “Angel Investor” in 1978 after completing a study on how
entrepreneurs raised capital for businesses. He used the term to describe investors who
supported start-up businesses with seed capital.

Silicon Valley is the home of modern angel investors and also home to the largest number of
start-ups in the United States. Silicon Valley received 39% of all the $7.5 billion investments
in the United States-based companies in Quarter 2 of 2011. Total funding reached $22.5
billion in 2011, $2.4 billion more than the investments in 2010. With platforms like
AngelList, start-up companies can pitch directly to potential angel investors and secure
funding for their business. Also, there are dozens of boot camps and conferences every year
where entrepreneurs meet with investors one-on-one and pitch their ideas.

Contrary to popular belief, most angel investors are not millionaires. There are angel
investors who earn $60,000 to $100,000. Some are retired entrepreneurs, doctors, lawyers,
and successful people in business looking for ways to stay updated with the happenings of the
business and earn an income on the side. Furthermore, they make use of their entrepreneurial
skills, experience, and networks to help new entrepreneurs launch their business. Unlike
venture capitalists, angel investors do not solely rely on monetary returns for motivation.
They are motivated by the persistence of young entrepreneurs to succeed and build an empire
for themselves and hope the money will follow.

Source of Funds
Unlike venture capitalists who invest using money from other investors, angel investors fund
entrepreneurs using their own money. The funds may come from a limited liability company,
business, trust, or investment fund. Angel investors mostly come in during the second round
of start-up financing, after raising funds from family and friends. The funds from angel
investors can range from a few thousand to a few million dollars, depending on the nature of
the business. The leading sectors in terms of angel investments are technology, healthcare,
software, biotech, and energy industries. In the United States, an angel investor must have a
minimum net worth of $1 million and an annual income of $200,000, as required by
the Securities Exchange Commission (SEC).

Source of Angel Investments

The most common sources of angel investments are wealthy individuals, crowdfunding, and
angel syndicates. The investments may go up to $500,000 or even more. You can find such
investors through referrals, local attorneys, and associations like the Chamber of Commerce.

Angel investors may also group themselves into a syndicate and raise potential investments
for the group fund. The investors may then appoint a professional syndicate management
team to identify business start-ups for possible investment. The team will also be charged
with the responsibility of following up on the investments and taking an active management
role in the business to ensure that the funds are secure.

The latest source of angel investment is crowdfunding. Crowdfunding is an online form of

investing where a large group of individuals contribute funds to a pool. They may invest as
little as $1,000. The money is then used to fund multiple for-profit entrepreneurial ventures.
In 2015, there were over 2,000 crowdfunding platforms worldwide that raised over $34
billion.

An angel investor will look for not only an investment opportunity but also a personal
opportunity. They have valuable business experience and may want to have an active role in
the management of the business. Before accepting an angel investment, you should
understand what the investor brings to the company besides money.

Angel vs Venture Capital vs Private Equity

Angel investors invest at the earliest stage, while Venture Capital (VC) firms invest later, and
Private Equity (PE) invests last (generally speaking).

To learn more, see our guide to Angles, VCs, and PE firms.

 
  

Where to Find Angel Investors

The best place to start when looking for an angel investor is to look close to home or on angel
investor network sites. Most investors will want to invest in local start-up businesses since it
will be easier to track the progress of the business.

AngelList, Angelsoft, MicroVentures, and Angel Capital Association have an online listing
of angel investors who are members in good standing and are looking to invest in potential
high-growth businesses. Check out the angel investors listed on the sites and find out what
you need to make a pitch. Some sites allow you to send a pitch online at a fee. However, most
investors will require you to make a presentation in 20 minutes or less before deciding
whether to invest in the business or not. Also, keep track of angel investment conferences in
your state that you can attend and meet potential investors.

Secondary Market

By 
WILL KENTON
 
 
Reviewed by 
SOMER ANDERSON
 
 
Updated Nov 28, 2020
What Is a Secondary Market?
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," though stocks are also sold on the primary market when they are
first issued. The national exchanges, such as the New York Stock Exchange (NYSE) and the NASDAQ, are
secondary markets.

Volume 75%
 
1:18

Secondary Market

Understanding Secondary Market

Though stocks are one of the most commonly traded securities, there are also other types of secondary
markets. For example, investment banks and corporate and individual investors buy and sell mutual funds
and bonds on secondary markets. Entities such as Fannie Mae and Freddie Mac also purchase mortgages on
a secondary market.

Transactions that occur on the secondary market are termed secondary simply because they are one step
removed from the transaction that originally created the securities in question. For example, a financial
institution writes a mortgage for a consumer, creating the mortgage security. The bank can then sell it to
Fannie Mae on the secondary market in a secondary transaction.

KEY TAKEAWAYS

 In secondary markets, investors exchange with each other rather than with the issuing entity.
 Through massive series of independent yet interconnected trades, the secondary market drives the
price of securities toward their actual value.
Primary vs. Secondary Markets
It is important to understand the distinction between the secondary market and the primary market. When a
company issues stock or bonds for the first time and sells those securities directly to investors, that
transaction occurs on the primary market. Some of the most common and well-publicized primary market
transactions are IPOs, or initial public offerings. During an IPO, a primary market transaction occurs
between the purchasing investor and the investment bank underwriting the IPO. Any proceeds from the sale
of shares of stock on the primary market go to the company that issued the stock, after accounting for the
bank's administrative fees.

If these initial investors later decide to sell their stake in the company, they can do so on the secondary
market. Any transactions on the secondary market occur between investors, and the proceeds of each sale go
to the selling investor, not to the company that issued the stock or to the underwriting bank.

Secondary Market Pricing

Primary market prices are often set beforehand, while prices in the secondary market are determined by the
basic forces of supply and demand. If the majority of investors believe a stock will increase in value and
rush to buy it, the stock's price will typically rise. If a company loses favor with investors or fails to post
sufficient earnings, its stock price declines as demand for that security dwindles.

Multiple Markets
The number of secondary markets that exists is always increasing as new financial products become
available. In the case of assets such as mortgages, several secondary markets may exist. Bundles of
mortgages are often repackaged into securities such as GNMA pools and resold to investors.
Secondary Market
In this article [show]
What is the Secondary Market?

A secondary market is a platform wherein the shares of companies are traded among investors. It
means that investors can freely buy and sell shares without the intervention of the issuing company. In
these transactions among investors, the issuing company does not participate in income generation, and
share valuation is rather based on its performance in the market. Income in this market is thus generated
via the sale of the shares from one investor to another.

Some of the entities that are functional in a secondary market include –

 Retail investors.
 Advisory service providers and brokers comprising commission brokers and security dealers,
among others.
 Financial intermediaries including non-banking financial companies, insurance companies, banks
and mutual funds.

Different Instruments in the Secondary Market 

The instruments traded in a secondary market consist of fixed income instruments, variable income
instruments, and hybrid instruments.

 Fixed income instruments

Fixed income instruments are primarily debt instruments ensuring a regular form of payment such as
interests, and the principal is repaid on maturity. Examples of fixed income securities  are – debentures,
bonds, and preference shares.

Debentures are unsecured debt instruments, i.e., not secured by collateral. Returns generated from
debentures are thus dependent on the issuer’s credibility.

As for bonds, they are essentially a contract between two parties, whereby a government or company
issues these financial instruments. As investors buy these bonds, it allows the issuing entity to secure a
large amount of funds this way. Investors are paid interests at fixed intervals, and the principal is repaid
on maturity.

Individuals owning preference shares in a company receive dividends before payment to equity
shareholders. If a company faces bankruptcy, preference shareholders have the right to be paid before
other shareholders.

 Variable income instruments

Investment in variable income instruments generates an effective rate of return to the investor, and
various market factors determine the quantum of such return. These securities expose investors to higher
risks as well as higher rewards. Examples of variable income instruments are – equity and derivatives.

Equity shares are instruments that allow a company to raise finance. Also, investors holding equity
shares have a claim over net profits of a company along with its assets if it goes into liquidation.

As for derivatives, they are a contractual obligation between two different parties involving pay-off for
stipulated performance.

 Hybrid instruments

Two or more different financial instruments are combined to form hybrid instruments. Convertible
debentures serve as an example of hybrid instruments.

Convertible debentures are available as a loan or debt securities which may be converted into equity
shares after a predetermined period.

Functions of Secondary Market

 A stock exchange provides a platform to investors to enter into a trading transaction of bonds,

shares, debentures and such other financial instruments.
 Transactions can be entered into at any time, and the market allows for active trading so that
there can be immediate purchase or selling with little variation in price among different transactions.
Also, there is continuity in trading, which increases the liquidity of assets that are traded in this market.
 Investors find a proper platform, such as an organised exchange to liquidate the holdings. The
securities that they hold can be sold in various stock exchanges.
 A secondary market acts as a medium of determining the pricing of assets in a transaction
consistent with the demand and supply. The information about transactions price is within the public
domain that enables investors to decide accordingly.
 It is indicative of a nation’s economy as well, and also serves as a link between savings and
investment. As in, savings are mobilised via investments by way of securities.

Types of Secondary Market 

Secondary markets are primarily of two types – Stock exchanges and over-the-counter markets.

 Stock exchange

Stock exchanges are centralised platforms where securities trading take place, sans any contact between
the buyer and the seller. National Stock Exchange  (NSE) and Bombay Stock Exchange  (BSE) are
examples of such platforms.

Transactions in stock exchanges are subjected to stringent regulations in securities trading. A stock
exchange itself acts as a guarantor, and the counterparty risk is almost non-existent. Such a safety net is
obtained via a higher transaction cost being levied on investments in the form of commission and
exchange fees.

 Over-the-counter (OTC) market

Over-the-counter markets are decentralised, comprising participants engaging in trading among

themselves. OTC markets retain higher counterparty risks in the absence of regulatory oversight, with
the parties directly dealing with each other. Foreign exchange market (FOREX) is an example of an
over-the-counter market.

In an OTC market, there exists tremendous competition in acquiring higher volume. Due to this factor,
the securities’ price differs from one seller to another.

Apart from the stock exchange and OTC market, other types of secondary market include auction
market and dealer market.

The former is essentially a platform for buyers and sellers to arrive at an understanding of the rate at
which the securities are to be traded. The information related to pricing is put out in the public domain,
including the bidding price of the offer.

Dealer market is another type of secondary market in which various dealers indicate prices of specific
securities for a transaction. Foreign exchange trade and bonds are traded primarily in a dealer market.

Examples of Secondary Market Transactions

Secondary market transactions provide liquidity to all kinds of investors. Due to high volume
transactions, their costs are substantially reduced. Few secondary market examples related to
transactions of securities are as follows.

In a secondary market, investors enter into a transaction of securities with other investors, and not the
issuer. If an investor wants to buy Larsen & Toubro stocks , it will have to be purchased from another
investor who owns such shares and not from L&T directly. The company will thus not be involved in
the transaction.

Individual and corporate investors, along with investment banks, engage in the buying and selling of
bonds and mutual funds in a secondary market.

Advantages of Secondary Market

 Investors can ease their liquidity problems in a secondary market conveniently. Like, an investor
in need of liquid cash can sell the shares held quite easily as a large number of buyers are present in the
secondary market.
 The secondary market indicates a benchmark for fair valuation of a particular company.
  Price adjustments of securities in a secondary market takes place within a short span in tune with
the availability of new information about the company.
 Investor’s funds remain relatively safe due to heavy regulations governing a secondary stock
market. The regulations are stringent as the market is a source of liquidity and capital formation for
both investors and companies.
 Mobilisation of savings becomes easier as investors’ money is held in the form of securities.

Disadvantages of Secondary Market

 Prices of securities in a secondary market are subject to high volatility, and such price fluctuation
may lead to sudden and unpredictable loss to investors.
 Before buying or selling in a secondary market, investors have to duly complete the procedures
involved, which are usually a time-consuming process.
 Investors’ profit margin may experience a dent due to brokerage commissions levied on each
transaction of buying or selling of securities.
 Investments in a secondary capital market are subject to high risk due to the influence of
multiple external factors, and the existing valuation may alter within a span of a few minutes.

Difference between Primary and Secondary Market

Primary Market Secondary Market

Securities are initially issued in a primary market. After

Trading of already issued securities take
issuance, such securities are listed in stock exchanges for
secondary market.
subsequent trading.

Investors enter into transactions among t

Investors purchase shares directly from the issuer in the primary
purchase or sell securities. Issuers are thus
market.
such trading.

Prices of the traded securities in a seconda

The stock issue price in a primary market remains fixed.
according to the demand and supply of

Sale of securities in a primary market generates fund for the Transactions made in this market generate
issuer. investors.

Issue of security occurs only once and for the first time only. Here, securities are traded multiple

Primary markets lack geographical presence; it cannot be A secondary market, on the contrary, has an
attributed to any organisational set-up as such. presence in the form of stock exch

As for the platform provided by a secondary market, it facilitates stock trading  and also enables
converting securities into cash. Continuous trading in a secondary market also increases the liquidity of
traded assets. Investors are thus encouraged to undertake investments in financial instruments available
in secondary markets for substantial corpus creation. It is ideal to take the assistance of fund managers
to make the most of investment in a volatile market scenario.
How Does the Stock Market Work in India

 23 Jun 2021
 

 Team Groww

 
 6 min read

Share: 

WhatsAppFacebookLinkedInTwitterReddit
We all know how important it is to invest money in the right avenues to grow wealth. Stock market
investment is one such lucrative option that has rewarded investors with high returns over the years.
However, to gain the maximum out of a financial instrument, it is essential to know about its workings.
Let’s get back to the basics and learn how the stock market works in India.

Read on!

In this article [show]
Participants of the Stock Market 

The stock market is an avenue where investors trade in shares, bonds, and derivatives. This trading is
facilitated by stock exchanges, which can be thought of as markets that connect buyers and sellers. Four
participants are involved in the Indian stock market.

Investing in stocks is now super simple

 Free Demat account

 Zero maintenance charges
OPEN DEMAT ACCOUNT
1. Securities and Exchange Board of India  (SEBI): SEBI is the regulator of stock markets in India
and ensures that securities markets in India work in order. SEBI lays down regulatory frameworks
where exchanges, companies, brokerages, and other participants have to abide by to protect investors’
interests.

2. Stock exchanges : The stock market is an avenue where investors trade in shares, bonds, and
derivatives. This trading is facilitated by stock exchanges. In India, there are two primary stock
exchanges on which companies are listed.

 Bombay Stock Exchange (BSE) – Sensex is its index

 National Stock Exchange (NSE) – Nifty is its Index

3. Stockbrokers /brokerages: A broker is an intermediary ( person or a firm) that executes buy and sell
orders for investors in return for a fee or a commission.

4. Investors and traders: Stocks are units of a company’s market value. Investors are individuals who
purchase stocks to become part owners of the company. Trading involves buying or selling this equity.
To understand how to share market works, the next thing is to learn about primary and secondary
markets

1. Primary Markets 

The primary stock market  provides an opportunity to issuers of stocks, especially corporates, to raise
resources to meet their investment requirements and discharge some obligations and liabilities.

A company lists its shares in the primary market through an Initial Public Offering or IPO. Through an
IPO, a company sells its shares for the first time to the public. An IPO opens for a particular period.
Within this window, investors can bid for the shares and buy them at the issue price announced by the
company.

Once the subscription period is over, the shares are allotted to the bidders. The companies are then
called public because they have given out their shares to the common public.

For this, companies need to pay a fee to the stock exchanges. They are also required to provide all
important details of the company’s financial information such as quarterly/annual reports, balance
sheets, income statements, along with information on new projects or future objectives, etc. to the stock
markets.

2. Secondary Market

The last step involves listing the company on the stock market, which means that the stock issued during
the IPO can now freely be bought and sold. The secondary stock market  is where shares of a company
are traded after being initially offered to the public in the primary market. It is a market where buyers
and sellers meet directly.
Trading in the Stock Market

Once listed on the stock exchanges, the stocks issued by companies can be traded in the secondary
market to make profits or cut losses. This buying and selling of stocks listed on the exchanges are done
by stockbrokers /brokerage firms, that act as the middleman between investors and the stock exchange.

Your broker passes on your buy order for shares to the stock exchange. The stock exchange searches for
a sell order for the same share.

Once a seller and a buyer are found and fixed, a price is agreed to finalize the transaction. Post that the
stock exchange communicates to your broker that your order has been confirmed.

This message is then passed on to you by the broker.

Meanwhile, the stock exchange also confirms the details of the buyers and the sellers of shares to ensure
the parties don’t default.

It then facilitates the actual transfer of ownership of shares from sellers to buyers. This process is called
the settlement cycle.

Earlier, it used to take weeks to settle stock trades. But now, this has been brought down to T+2 days.

For example,

If you trade a stock today, you will get your shares deposited in your Demat/trading account by the day
after tomorrow (i.e. within two working days).

The stock exchange also ensures that the trade of stocks is honored during the settlement.

If the settlement cycle doesn’t happen in T+2 days, the sanctity of the stock market is lost, because it
means trades may not be upheld.

Stockbrokers  identify their clients by a unique code assigned to an investor.

After the transaction is done by an investor, the stockbroker issues him/her a contract note which
provides details of the transaction such as time and date of the stock trade.

Apart from the purchase price of a stock, an investor is also supposed to pay brokerage fees, stamp duty,
and securities transaction tax.

In case of a sale transaction, these costs are reduced from the sale proceeds, and then the remaining
amount is paid to the investor.

At the broker and stock exchange levels, there are multiple entities/parties involved in the
communication chain like brokerage order department, exchange floor traders, etc.

But the stock trading process has become electronic today. So, the process of matching buyers and
sellers is done online and as a result, trading happens within minutes.

Pricing of Shares in the Stock Market

The key to making money in the stock market is to learn how to properly value a company and its share
price in the context of the Indian economy and the firm’s operating sector.

Let me explain to you how stocks are priced through a simple example.

Let’s say you bought a notebook for ₹100. The next day, a friend of yours offered you to sell it for
₹150 to him.

So, what’s the price of the notebook then?

It is from ₹150. You can encash ₹150 by selling the notebook to him.

But you choose to reject his offer hoping that your other friends may bid more than ₹150.

The very next day 3 of your friends offer you ₹200, ₹250 and ₹300 for the notebook respectively.

Now, what’s the price of the notebook?

It’s ₹300 as this is the highest bid for your notebook. You now know that your possession is valuable
and decide to reject the current offers, hoping for a higher bid tomorrow. However, the next day, a
fellow student brings a better quality notebook to school with shinier pages.
Your friends are now attracted to this notebook more than yours and this leads to a dip in the value of
your notebook. Now only a handful of people are willing to pay for your notebook and that too at the
last quoted price i.e ₹300.

This is exactly how demand and supply affect the price of a share in the stock market.

When the students were optimistic and ready to pay higher cash than its current price, the price
appreciated. When a lesser number of students wanted your notebook, the price fell down.

Just keep this small concept in your mind:

 When the demand for shares is more than supply, the price rises.
 When the demand for shares is less than supply, the price falls.

The Indian stock exchanges, BSE and NSE, have algorithms that determine the price of stocks on the
basis of volume traded and these prices change pretty fast. So this is how the stock market works in
India. There is definitely more to it however this is a good starting point to develop further
understanding.

How are Different Stocks Categorized?

 26 Jun 2020
 

 Team Groww

 
 5 min read

Share: 

WhatsAppFacebookLinkedInTwitterReddit
A stock is a share in a company. When a company is formed, there are some shareholders and investors
who own the company. However, as it grows and needs funds for expansion, it has the option of ‘going
public’ by issuing shares to the general public. It asks investors to buy a shareholding in the company in
exchange for a proportionate share in the profits. While this is the fundamental concept of stocks, as an
investor, you need to know about the different categories of stocks to make informed decisions.

Stocks are categorized on various criteria. Today, we will look at these criteria and understand them one
by one.

In this article [show]
Categorization Criteria – Ownership
 As I explained above, a stock offers ownership in a company. However, this ownership can have certain
features based on the type of shares issued by the company. The primary categories based on ownership
are:

Investing in stocks is now super simple

 Free Demat account

 Zero maintenance charges
OPEN DEMAT ACCOUNT
I. Common Stock – It offers ownership in the company with voting rights to elect the board of
directors. Stockholders having common stocks are eligible to receive a part of the company’s profits via
dividends. These are the most common types of stock in India.
II. Preferred Stock – It also offers ownership in the company but doesn’t come with the same
voting rights as common stocks. These stocks receive promised dividends which are not available with
common stocks. Also, if the company liquidates, then these stocks get preference over common stocks.
III. Convertible Preference Shares – These are initially issued as preference stocks that are
converted into a fixed number of common stock at a specific time. The company can decide to offer
voting rights with these stocks or not.
IV. Stocks with embedded derivative options – Once a company issues shares, it usually doesn’t
buy them back unless it deems fit. However, some companies issue stocks with embedded derivative
options – call-able or put-able. In a call-able option, the company can buy back its stocks at a specific
price or a specific time. In the put-able option, the company can provide the investor with an option to
sell the stock back to the company at a specific price or a specific time. These are not commonly issued
by companies.

Categorization Criteria – Market Capitalisation

Market capitalization, in simple terms, is the total market value of a company’s outstanding shares. The
calculation is simple:

Market capitalization = total number of outstanding shares x market price of one share

Let’s say that a company issues one lakh shares at Rs.10 per share and raises Rs.10 lakh. After three
years, the market price of one share is Rs.30. Therefore, the market capitalization of the company will
be:

Market Cap = 100,000 x 30 = Rs.30 lakh

Talking about stock market categories, shares can be classified based on their market capitalization too.
There are three major categories of shares based on the market capitalization of the company:

I. Small-cap stocks
II. Mid-cap stocks
III. Large-cap stocks
 The Securities and Exchanges Board of India (SEBI) creates a list of companies with their market
capitalization and defines these companies as follows:

I. Large-cap companies – The top 100 companies in terms of market capitalization. These are the
market stalwarts and famous brand names. They also tend to pay good dividends to their shareholders.
II. Mid-cap companies – Those ranking between 101 and 250 in the list of companies as per market
capitalization. These are growing companies that have been around for some time and with a sizable
customer base. Some of these are on their way to becoming the large-caps of the future.
III. Small-cap companies – All the remaining companies. The major chunk of the market consists of
small-cap companies. While some of them offer a huge potential for growth, others fail to survive the
economic volatility. This makes them the riskiest stocks to invest in. However, if you pick the right
ones, then they also provide a great opportunity for wealth creation.

Categorization Criteria – Profit Sharing 

When you purchase a stock, you become a shareholder in the company and are eligible to receive a
share of the profits based on the amount invested. Usually, companies share profits with their
shareholders in the form of dividends.

A company can either share profits by directly distributing dividends to its shareholders or invest its
profits to improve and grow its business. Based on how the company shares its profits, you get
two categories of stocks:

I. Income Stocks – These stocks offer consistent dividend payouts. They are called income stocks
since they can add to the income of the shareholder. These stocks usually belong to companies that have
strong finances and can share dividends from their profits every year. However, since the profits are
distributed, these companies grow at a steady pace and are considered low-risk investments.
II. Growth Stocks – These stocks don’t pay dividends. Instead, the company reinvests its profits to
grow its business. Such companies aggressively seek growth and the prices of their stocks grow rapidly.
This offers the stockholder an opportunity to earn profit by selling the stocks and making capital gains.
These are considered riskier than income stocks since the profits are based on the market price that can
fluctuate for reasons beyond the control of the company.

Categorization Criteria – Intrinsic Value 

While the market price of a stock depends on the demand and supply of the said stock in the market,
most investors assess the financials of the company before buying its stock. For example, if a particular
stock is trading at Rs.500 per share, then is the company strong enough to invest this amount? Or, is a
market hype or rally driving the price up? Understanding the intrinsic value helps determine how much
the market price deviates from the true value of the price of a share in the said company. Based on the
intrinsic value, there are two types of stocks:

I. Overvalued stocks – These are stocks that have a market price that cannot be justified by its
earnings outlook. Hence, the market price of such stocks is higher than their intrinsic value.
II. Undervalued stocks – These stocks have a market price lower than their intrinsic value.

Categorization Criteria – Economic Trends 

 When the stock markets react to some news about the economy, all stocks don’t move in tandem. While
a certain section falls with negative news about the economy, another section seems unperturbed. Based
on the way stocks react to economic trends, they can be categorized into two types:

I. Cyclical stocks – These stocks move in sync with the economy. Hence, when the economic
trends are negative, the prices of these stocks drop and vice versa. Investing in such stocks is usually
beneficial in a booming economy.
II. Defensive stocks – These stocks don’t react strongly to economic trends. Some examples of such
stocks are food, medicines, insurance, etc. These are considered safer to invest in.

Categorization Criteria – Price Volatility

While some investors thrive on price volatility, others prefer stocks that are relatively stable. Based on
price volatility, stocks can be classified into the following two types:

I. Beta stocks – Investment analysts use a statistical measure called the coefficient of beta to find
the volatility in stock prices. If a stock has a higher beta, it means that the investment risk is higher.
II. Blue-chip stocks – These are the most stable stocks since the companies are well-established.
Some examples are companies like Reliance Industries, Infosys, etc.

Summing Up

Understanding the different types of stocks can help you choose the right stocks to help you meet your
financial goals. So, once you have an investment plan in place, use this knowledge to select stocks that
are in sync with your plan. Remember, successfully investing is about managing risks efficiently while
trying to optimize returns. With sufficient knowledge, you can make informed decisions and see your
wealth grow. Create a category wise stock list to help you make decisions in the future.

Secondary Market
Where investors buy and sell securities from other investors

What is the Secondary Market?

The secondary market is where investors buy and sell securities from other investors (think
of stock exchanges). For example, if you want to buy Apple stock, you would purchase the
stock from investors who already own the stock rather than Apple. Apple would not be
involved in the transaction.

Examples of popular secondary markets are the National Stock Exchange (NSE), the New
York Stock Exchange (NYSE), the NASDAQ, and the London Stock Exchange (LSE).

Importance of a Secondary Market

The secondary market is important for several reasons:

 The secondary market helps measure the economic condition of a country. The
rise or fall in share prices indicates a boom or recession cycle in an economy.
 The secondary market provides a good mechanism for a fair valuation of a
company.
 The secondary market helps drive the price of securities towards their genuine,
fair market value through the basic economic forces of supply and demand.
 The secondary market promotes economic efficiency. Each sale of a security
involves a seller who values the security less than the price and a buyer who values
the security more than the price.
 The secondary market allows for high liquidity – stocks can be easily bought and
sold for cash.

The Difference Between Primary Market and Secondary Markets

There are two types of markets to invest in securities – the Primary Market and Secondary
Market. These two markets are often confused with each other.

The Primary Market

This is the market where securities are created. In the primary market, companies sell new
stocks and bonds to investors for the first time. This is usually done through an Initial Public
Offering (IPO). Small investors are not able to purchase securities in the primary market
because the issuing company and its investment bankers are looking to sell to large investors
who can buy a lot of securities at once. The primary market provides financing for issuing
companies.
 

The Secondary Market

This is the market where securities are traded. Investors trade securities without the
involvement of the issuing companies. Investors buy and sell securities among themselves.
The secondary market does not provide financing to issuing companies –they are not
involved in the transaction. The amount received for a security in the secondary market is
income for the investor who is selling the securities.

 
 

The primary market provides interaction between the company and the investor, while the
secondary market is where investors buy and sell securities from other investors.

Secondary Market: Exchanges and OTC Market

1. Exchanges

Securities traded through a centralized place with no direct contact between seller and buyer.
Examples are the New York Stock Exchange (NYSE) and the London Stock Exchange
(LSE).

In an exchange-traded market, securities are traded via a centralized place (for example, the
NYSE and the LSE). Buys and sells are conducted through the exchange and there is no
direct contact between sellers and buyers. There is no counterparty risk – the exchange is the
guarantor. Exchange-traded markets are considered a safe place for investors to trade
securities due to regulatory oversight. However, securities traded on an exchange-traded
market face a higher transaction cost due to exchange fees and commissions. 

2. Over-the-counter (OTC) Markets

No centralized place where securities are traded. In the over-the-counter market, securities
are traded by market participants in a decentralized place (e.g., the foreign exchange market).
The market is made up of all participants in the market trading among themselves. Since the
over-the-counter market is not centralized, there is competition between providers to gain a
higher trading volume for their company. Prices for the securities vary from company to
company. Therefore, the best price may not be offered by every seller in an OTC market.
 Since the parties trading on the OTC market are dealing with each other, OTC markets are
prone to counterparty risk.

Secondary market

Key Takeaways

 The secondary market refers to space where securities are traded after changing hands from the
original issuer.

 OTC and Exchanges are the two main types of secondary markets.

What is the Secondary Market?

The secondary market refers to space where securities are traded after changing hands from the original
issuer. Often it is an exchange, and the securities could be either equity shares, ETFs, or close-ended funds.

For ETFs, this refers to the exchange on which ETF units are traded by retail investors. It is called a
secondary market because the ETF units are twice removed from their creator, as authorized participants
further break up their block units and then release them for trading in the secondary market.

What is the difference between the primary market and the secondary market?

When a company or central bank issues a financial instrument for the first time, and it is sold to the investors
directly, this transaction is said to have happened in a primary market. Some of the common primary market
transactions include initial public offerings or IPO. In an IPO, the transaction occurs between the investor
and the investment bank, who is underwriting the IPO. 

When these initial investors decide to let go of or sell their stake in the business, they can do that through the
secondary market. The proceeds of such secondary transactions do not go to the issuing company.

What are the types of Secondary markets?

Secondary markets are primarily of two types which are mentioned below:

 Over-The-Counter or OTC Market

These markets are a decentralized space where investors trade amongst themselves. In such markets, there is
a very fierce competition to get higher volumes, which leads to a difference in prices from one seller to
another. Compared with exchanges, the risk is higher as the seller and buyer deal on a one-to-one basis. The
foreign exchange market is an example of OTC markets.

 Exchanges

In this type of secondary market, one will not find direct contact between the seller and the buyer of the
security. To make trading safe and secure, heavy regulations are in place. Counterparty risk, in this case, is
almost zero as the exchange is a guarantor. In Exchanges, there is a comparatively high transaction cost
because of the exchange fees and commission.

Secondary markets can also be divided as:

 Auction Market

This type of secondary market offers a platform to the sellers and buyers to meet and announce the price at
which they both want to transact their securities.

 Dealer Market

In this type of market, electronic platforms such as fax machines or telephones facilitate the transactions.

Advantages of Secondary Markets

The benefits of secondary market trading are:

 It offers investors to make good gains in a shorter period.

  The stock price in these markets helps in evaluating a company effectively.
 For an investor, the ease of selling and buying in these markets ensures liquidity.
 Trading in secondary markets does not require a hefty amount, thus facilitating investments of small
ticket investors.
 Secondary markets help in analyzing the economic health of a company. 

Disadvantages of Secondary Markets

The drawbacks of trading through secondary markets are:

 Price fluctuations are very high in secondary markets, which can lead to a sudden loss.
 Trading through secondary markets can be very time consuming as investors are required to
complete some formalities.
 Sometimes, government policies can also act as a hindrance in secondary markets.
 Brokerage fees are high as every time an investor sells or buys shares, he/she needs to pay a
brokerage commission.

Functions of Secondary Markets | Features of Secondary Markets:

Following are the secondary market characteristics:

 Secondary markets provide liquidity to investors

 Secondary markets enable the investors to check the price of various financial instruments, including
shares and bonds along with their interest rates
 The secondary market acts like an intermediary as it helps determine the price of securities during a
transaction
 Secondary market assists in mobilizing and channelizing the savings of investors

What is the difference between Primary and Secondary Market? | Primary Market vs
Secondary Market

Primary Market Secondary Market

When new stocks and bonds are publicly sold for the first time
by the company, it is through the primary market.
Primary Market is also referred to as new issues market.
Investment Banks are considered to be the intermediaries
A secondary market is a place where the
securities issued in the primary markets are
traded.  
Secondary market is sometimes also referred
to as stock market.
The broker is an intermediary in a secondary
between the company and investors willing to buy shares in the
market
primary market

Secondary Market
What is Secondary Market?

Also known as aftermarket, is the follow on of public offering in the market. It is the place where stocks,
bonds, options and futures, issued previously, are bought and sold. Simply put, it is a marketplace where
securities issued earlier, are sold and purchased.

The secondary market facilitates the liquidity and marketability of securities. For management of company it
serves as a monitoring and controlling channel by:

 Facilitating value buildup control activities and,

 Accumulates information with market capitalization
Secondary market provides real time valuation of securities on the basis of demand and supply.

Secondary market definition itself states that it is second-hand market, when previously issued securities are
bought and sold.

Now let’s see what is secondary market for general investors, secondary market is a place which provides an
efficient platform for trading of securities i.e. to provide liquidity to convert investments into cash.

Types of Secondary Market:


Over the Counter market:

OTC market refers to the process where securities are traded in an informal way i.e. that is not listed on a
formal exchange.


Under this the securities that didn’t fulfill the requirements to have a listing on a standard market exchange.
It is a bilateral contract, where two parties are involved i.e. the investor and dealer.

 Stocks traded in OTC market are basically of smaller companies that cannot meet exchange
requirements for formal exchange.

Exchange traded market:


Exchange-traded market also known as auction market is a place where all the transactions are routed
through a central source (exchange) that is completely responsible for being the intermediary that connects
buyers and sellers.


Market Participant in Secondary Market:
 Buyers
 Sellers
 Intermediaries
Products in Secondary market:


Equity:

Equity is the ownership in a company where all the shareholders have equal rights irrespective of the
number of shares held by them. This includes:


. Equity shares
. Right issue or Right share
. Bonus shares

Preference shares:

Preferred shares also referred to as Preferred stocks. It is a form of stock which is a mix of features, not
possessed by common stock properties, it is generally considered as a Hybrid Instrument.


Owners of these securities are entitled to a fixed dividend to be paid regularly before any dividend can be
paid on Equity shares. The preference shares are categorized into:


. Cumulative preference shares
. Participating preference shares

Government Securities(G-sec):

G-sec is a bond or debt obligation that is issued by Reserve Bank of India on behalf of Government of India,
in substitute of the central government’s market borrowing programme with a promise of repayment upon
the security maturity date.


These are generally considered as low-risk investments because they are backed by the taxing power of a
government.


These securities have fixed coupon that is paid on specific dates on half-yearly basis.



Debentures:

Debentures are referred to as long-term securities bearing a fixed rate of interest which are issued by a
company and secured against the assets. These are usually payable half yearly on specific dates with
principal amount repayable on maturity date.


Debentures are divided into two categories:


. Non-convertible debentures
. Convertible debentures

Bonds:

Bond is a negotiable instrument generally issued by a company, municipality or government agency which
provides evidence of indebtedness. An investor in bond lends money to the issuer and the issuer in exchange
promises to repay the loan on a specified maturity date. The issuer pays interest periodically over the tenure
of the loan. Its tenure can be upto 30 years. There are various types of bonds:


. Zero Coupon Bonds
. Convertible Bonds
. Commercial paper
. Treasury Bills
How to Purchase Equity in Secondary Market?

 Open a Demat and trading account with the depository participant/broker

 Link your bank account with Demat and Trading account
 With help of broker and use of multiple trading platforms it is made easier to buy or sell shares
 The broker buys or sells the shares by executing orders on the electronic terminal provided by the
stock exchange
 A contract note is issued by the broker detailing the value of shares purchased plus his brokerage cost
 The broker collects shares via settlement process(T+1) and makes payment on behalf of the investors
 Order gets executed on the final settlement date(T+2)
 The shares get credited or debited in your demat account
egulations in India

Indian Capital Markets are regulated and monitored by the Ministry of Finance, The Securities and
Exchange Board of India and The Reserve Bank of India.

The Ministry of Finance regulates through the Department of Economic Affairs - Capital Markets Division.
The division is responsible for formulating the policies related to the orderly growth and development of the
securities markets (i.e. share, debt and derivatives) as well as protecting the interest of the investors. In
particular, it is responsible for
 institutional reforms in the securities markets,
 building regulatory and market institutions,
 strengthening investor protection mechanism, and
 providing efficient legislative framework for securities markets.

 
The Division administers legislations and rules made under the
 Depositories Act, 1996,
 Securities Contracts (Regulation) Act, 1956 and
 Securities and Exchange Board of India Act, 1992.

 
The Regulators

Securities & Exchange Board of India (SEBI)

The Securities and Exchange Board of India (SEBI) is the regulatory authority established under the SEBI
Act 1992 and is the principal regulator for Stock Exchanges in India. SEBI’s primary functions include
protecting investor interests, promoting and regulating the Indian securities markets. All financial
intermediaries permitted by their respective regulators to participate in the Indian securities markets are
governed by SEBI regulations, whether domestic or foreign. Foreign Portfolio Investors are required to
register with DDPs in order to participate in the Indian securities markets.

More Information on : www.sebi.gov.in

 

Reserve Bank of India (RBI)

The Reserve Bank of India (RBI) is governed by the Reserve Bank of India Act, 1934. The RBI is
responsible for implementing monetary and credit policies, issuing currency notes, being banker to the
government, regulator of the banking system, manager of foreign exchange, and regulator of payment &
settlement systems while continuously working towards the development of Indian financial markets. The
RBI regulates financial markets and systems through different legislations. It regulates the foreign exchange
markets through the Foreign Exchange Management Act, 1999.

More Information on : www.rbi.gov.in

 

National Stock Exchange (NSE) – Rules and Regulations

In the role of a securities market participant, NSE is required to set out and implement rules and regulations
to govern the securities market. These rules and regulations extend to member registration, securities listing,
transaction monitoring, compliance by members to SEBI / RBI regulations, investor protection etc. NSE has
a set of Rules and Regulations specifically applicable to each of its trading segments. NSE as an entity
regulated by SEBI undergoes regular inspections by them to ensure compliance.

] REGULATION OF BUSINESS IN THE STOCK EXCHANGES

Under the SEBI Act, 1992, the SEBI has been empowered to conduct inspection of stock exchanges. The
SEBI has been inspecting the stock exchanges once every year since 1995-96. During these inspections, a
review of the market operations, organisational structure and administrative control of the exchange is made
to ascertain whether:

 the exchange provides a fair, equitable and growing market to investors

 the exchange’s organisation, systems and practices are in accordance with the Securities Contracts
(Regulation) Act (SC(R) Act), 1956 and rules framed thereunder
 the exchange has implemented the directions, guidelines and instructions issued by the SEBI from
time to time
 the exchange has complied with the conditions, if any, imposed on it at the time of renewal/ grant of
its recognition under section 4 of the SC(R) Act, 1956.

Based on the observations/suggestions made in the inspection reports, the exchanges are advised to send a
compliance report to SEBI within one month of the receipt of the inspection report by the exchange and
thereafter quarterly reports indicating the progress made by them in implementing the suggestions contained
in the inspection report. The SEBI nominee directors and public representatives on the governing
board/council of management of the stock exchanges also pursue the matters in the meetings of the
governing board/council of management. If the performance of the exchanges whose renewal of recognition
is due, is not found satisfactory, the SEBI grants further recognition for a short period only, subject to
fulfillment of certain conditions.

During the year, renewal of recognition was granted to three stock exchanges. The renewal of recognition to
Saurashtra - Kutch Stock Exchange was renewed for a further period of one year only as the exchange failed
to rectify the deficiencies pointed out in the inspection report and renewal of recognition of Jaipur Stock
Exchange was granted only for a period of one year as the exchange has not started Screen Based Trading.
The renewal of recognition of Vadodara stock Exchange was granted for a further period of three years.

During the year 1997-98, inspection of stock exchanges were carried out with a special focus on the
measures taken by the stock exchanges for investors protection. Stock exchanges were, through inspection
reports, advised to effectively follow-up and redress the investors’ complaints against members/listed
companies. The stock exchanges were also advised to expedite the disposal of arbitration cases within four
months from the date of filing.

During the earlier years’ inspections, common deficiencies observed in the functioning of the exchanges
were delays in post trading settlement, frequent clubbing of settlements, delay in conducting auctions,
inadequate monitoring of payment of margins by brokers, non-adherence to Capital Adequacy Norms etc. It
was observed during the inspections conducted in 1997-98 that there has been considerable improvement in
most of the areas, especially in trading, settlement, collection of margins etc.

Supersession of the governing board of Magadh stock exchange

The annual inspection of Magadh Stock Exchange for the year 1997-98 was conducted by the SEBI during
August 11-13, 1997. Based on the mismanagement and various irregularities observed in the functioning of
the exchange during the inspection and the complaints received from the Public Representative Directors
and SEBI Nominee Directors on the Council of Management of the exchange, a show-cause notice was
issued by the SEBI to the Council of Management of Magadh Stock Exchange as to why it should not be
superseded. The Council of Management did not respond to show-cause notice and also did not avail of the
two opportunities of personal hearing granted to them by the Chairman, SEBI. The SEBI received a letter
from the Executive Director of the exchange enclosing a copy of circular resolution passed by a majority of
the members of the Council of Management requesting SEBI to take immediate appropriate action in the
light of the complete breakdown in the administration of exchange.

Taking in view the gravity of the situation, the Chairman, SEBI, in pursuance of powers conferred on him
under Section 11 of the Securities Contracts (Regulation) Act, 1956, read with notification No. SO 573,
dated July 30, 1993 and Section 4(3) of the SEBI Act, 1992, superseded the Council of Management of the
exchange for a period of one year w.e.f. December 08, 1997 and appointed an Administrator as an
alternative arrangement.

The Administrator has been taking immediate steps to improve overall functioning of the exchange. An
Advisory Committee has also been constituted to assist the Administrator. The exchange is in the process of
constituting various Statutory Committees and also the appointment of an Executive Director. The
performance of the exchange is since being monitored on a monthly basis by the SEBI.

Expansion of BSE On-Line Trading System (BOLT)

In order to have a level playing field and to provide healthy competition in the Secondary Market, the SEBI
had, in October 1996, permitted stock exchanges to expand their trading terminals to locations outside the
city wherein such exchanges are located subject to compliance with certain conditions.

The stock exchanges were granted permission to expand their trading terminals to those cities where no
other stock exchange is located. The BSE On-Line Trading system (BOLT) has already been permitted to
expand to such cities subject to compliance with certain conditions imposed by the SEBI.

As for the cities where a stock exchange already exists, the exchanges seeking expansion were required to
enter into a Memorandum of Understanding (MoU) with the concerned stock exchange. Accordingly, the
Stock Exchange, Mumbai has entered into MoU with the Pune, Calcutta, Ahmedabad, and Rajkot stock
exchanges. After due consideration, the SEBI has permitted BOLT expansion to the cities of Pune, Calcutta
and Rajkot subject to fulfillment of certain conditions by these stock exchanges. The proposal of BOLT
expansion to Ahmedabad was under consideration by the SEBI.

Similar proposals by stock exchanges to expand outside their area of jurisdiction were also received from
Bangalore Stock Exchange and were under evaluation of the SEBI.

New Stock Exchanges

In December 1996, the SEBI had taken a policy decision, in public and trade interest, that grant of
recognition to new stock exchanges would be considered subject to fulfillment of the following conditions :

 The exchange would begin trading only after introduction of On-Line Screen Based Trading
 The exchange makes rules, regulations and bye-Laws with adequate provisions for investor
protection, with the approval of the SEBI and thereafter strictly follows them
 The exchange establishes a Clearing House within 6 months from the date of recognition

The SEBI received several applications for recognition of new stock exchanges. As on April 01, 1997, the
number of such pending applications/representations for new stock exchanges was 6. During the current
year 1997-98, 4 new applications were received. Out of a total of 10 applications/representations, 3 were
closed and 2 were granted ‘in-principle recognition’ during the year 1997-98. As on March 31, 1998, only 5
applications were pending which are under consideration of the SEBI.
The Capital Stock Exchange Kerala Limited (CSEKL) and The Inter-Connected Stock Exchange of India
(ISE) were granted ‘in-principle recognition’ by the SEBI subject to compliance with certain conditions.

The Inter-Connected Stock Exchange of India Limited (ISE)

The Inter-Connected Stock Exchange of India Limited (ISE) is being promoted by 14 regional stock
exchanges to set up a new national level stock exchange. The ISE will set up an Inter-Connected Market
System (ICMS) which would provide a national market in addition to the trading facility at the regional
stock exchanges. The proposed stock exchange has a broader objective of protecting the regional stock
exchanges as the consolidation of the market would increase the order flow to the regional stock exchanges
and help in their survival and also benefit the investors by offering them a national reach with greater
liquidity. The fourteen stock exchanges participating in the Inter-Connected Stock Exchange of India are :

1. Bangalore Stock Exchange

2. Bhubaneshwar Stock Exchange
3. Cochin Stock Exchange
4. Coimbatore Stock Exchange
5. Guwahati Stock Exchange
6. Hyderabad Stock Exchange
7. Jaipur Stock Exchange
8. Ludhiana Stock Exchange
9. Madhya Pradesh Stock Exchange
10. Magadh Stock Exchange
11. Mangalore Stock Exchange
12. Saurashtra Kutch Stock Exchange
13. Uttar Pradesh Stock Exchange
14. Vadodara Stock Exchange

Stock Exchange in India

A stock exchange is a place where securities, shares, bonds and other financial instruments are listed and
bought and sold by traders or brokers. To be able to trade on a stock exchange, securities must be listed on
it. Stock exchanges help companies to raise funds. Therefore the company needs to list themselves in the
stock exchange. Shares listed on the stock exchange are known as equity and these shareholders are known
as Equity Shareholders. Here we shall discuss the Stock Exchange in India.

Suggested Videos

Introduction to culture and civilisation

Cities and Challenge of Environment

Social Changes in Cities During Industrialisation

Introduction to culture and civilisation

Cities and Challenge of Environment

Social Changes in Cities During Industrialisation

Stock Exchange in India

Indian stock exchange is one of the oldest markets in Asia and is a yardstick to measure the health and
progress of the economy of the country. Over the course of the period, the market has transitioned into the
electronic market and securities are dealt in dematerialization form.

There are two major stock exchanges in India- National Stock Exchange of India (NSE) and Bombay Stock
Exchange (BSE). National Stock Exchange was established in Mumbai in 1992 and started trading in 1994.
Bombay Stock Exchange was established in 1875 in Mumbai.

Other stock exchanges are as follows-

1. Calcutta Stock Exchange in Kolkata

2. India International Exchange
3. Metropolitan Stock Exchange

Market Indices

There are two major indices in the stock exchange of India 鈥 Sensex and Nifty. Sensex comprises of the
weighted average of the market capitalization of stock of 30 well established and financially sound
companies across different key sectors in India. Nifty comprises of top 50 companies in 12 sectors of the
Indian economy in one portfolio. It reflects the health of the Indian economy from a broader perspective.

SENSEX is an indicator of Bombay Stock Exchange and NIFTY is an indicator of National Stock Exchange
of India.
Trading Hours and Settlement on Stock Exchange of India

Trading in the stock market in India takes place in between 9:55 AM to 3:30 PM Indian Standard Time,
Monday to Friday.

Settlement of securities takes places in T+2 period. It means if the transaction has happened on Tuesday, it
will be settled on Thursday.

Functions of Stock Exchange in India

Stock exchange in India ensures 鈥

1. Stability of prices of securities.

2. Convenient and transparent place to trade in securities.
3. Help companies to raise their funds.
4. Promote the habit of saving and investment
5. Provide forecasting service.

How to Deal in Stock Exchanges in India

In order to deal in stock exchange in India, one must have a Demat A/c. It is just like a bank account.
Various banks in India provide this facility. Through Demat A/c, an investor can buy or sell securities in
trading hours.

Regulation of Stock Exchange in India

Entire stock exchange of India is regulated by the Securities and Exchange Board of India (SEBI) which was
established in 1992 as an independent authority. SEBI has the power to impose fines and penalties in case of
violation of rules and regulations. It plays a pivotal role and protects the interest of investors in the stock
exchange of India. SEBI promotes education and training of intermediaries of the stock market.

Bull Market and Bear Market

A bull market is a market where buyers are aggressively buying the shares in an expectation that shares price
will rise and will sell at later date. A bear market is a market where prices are falling.

Strong economic conditions, high employment levels, the favorable government are few factors which lead
to a bull market whereas poor economic conditions, natural adversity, unemployment or sudden unfavorable
political changes lead to bear market.

Future of Stock Exchange in India

In a growing economy like India, the future of stock exchange is bright and the volume of transactions will
grow substantially in the coming years.

Out of 1.2 billion people, there are only 20 million demat accounts as of now. Government 鈥檚 initiative to
bring retail customers in 聽 mutual funds 聽 and foreign investments in India will help the stock exchange of
India.

Practice Question for Stock Exchange in India

Which of the following body regulates the Stock exchanges in India?

1. Reserve Bank of India (RBI)

2. Securities and Exchange Board of India (SEBI)
3. Government of India
4. Association of Mutual Funds (AMET)

Ans. Securities and Exchange Board of India (SEBI)