CHAPTER 1-INTRODUCTION

Primary & Secondary Markets

The primary market is a segment of the capital market where entities
such as companies, governments and other institutions obtain funds
through the sale of debt and equity-based securities.
• When a company decides to go public for the first time by raising
an Initial Public Offering (IPO), it is done in the primary market.
• Since the securities are sold for the first time here, a primary
market is also known as the New Issue Market (NIM).
• During an IPO, the company sells its shares directly to the
investors in the primary market. The entire process of raising
investment capital by selling new stock to investors through an IPO is
known as underwriting.
• Once the shares are sold, they are bought and sold by traders in
the secondary market.

Functions of Primary Market

1. New Issue Offer
• This is one of the major primary market functions.
• It is this market that organises the offering of a new issue, which
has not been traded on any other exchange before.
• It’s because of this reason that the primary market is also called
the new issue market.
• There’s a lot that goes into issuing a new offer.
2. Underwriting Services
• The role of an underwriter in the primary marketplace is to buy
unsold shares.
• Often financial institutions play the role of underwriters, earning a
commission in the process.
• Often investors depend on underwriters to gauge whether
undertaking the risk would be worth the returns.
3. Distribution of New Issue
• The distribution process is initiated with a new prospectus issue.
• The public is invited at large to purchase the new issue, and
detailed information is given on the company and the issue along
with the underwriters.

Advantages of Primary Market

1. A Cost-Effective Way to Raise Capital
• Companies can raise capital for their business cost-effectively and
seamlessly in a primary market. • Also, securities offered in the
primary market can almost be instantly sold in the secondary market,
thus providing high liquidity.
2. Fewer Chances of Price Manipulation
• As compared to the secondary market, there are fewer chances of
price manipulation in the primary market.
• This leads to better transparency and operations.
3. Offers Diversification
• Primary market serves as a potential avenue for diversification for
investors, thus bringing down the quantum of risk.
• Investors can allocate their investments across asset classes in
multiple financial instruments.

Disadvantages of Primary Market

1. Limited Information Available to Investors
• Often there may be limited information available to investors
before they invest in an IPO.
• This is because unlisted companies are outside the purview of
SEBI’s regulations.
2. No Historical Trading Data
• As shares are issued for the first time, there’s no historical data
available to analyse the IPO shares. This can make investment a little
difficult.

What are Secondary Markets?

A secondary market is also referred to as a stock market or stock
exchange.
• It is a market for buying and selling existing securities. It
encourages existing investors to exit and new investors to enter the
market.
• It also makes existing securities more liquid and marketable.
• It also contributes to economic growth by directing funds toward
the most productive investments via the disinvestment and
reinvestment process.
• SEBI's regulatory framework governs the trading, clearing, and
settlement of securities.
• Trading through stock exchanges is now possible from anywhere in
the country through trading terminals thanks to advances in
information technology.
• There are currently 21 stock exchanges in India, including the BSE,
NSE, and OTCEI. The Securities Contracts (Regulation) Act and SEBI
govern stock exchanges.
• Along with the expansion of the country's primary market, the
secondary market has expanded significantly over the last ten years.
Components of Secondary Markets
There are two more components to the secondary markets:
1. Spot market – Here the securities are traded for immediate
delivery and payment.
2. Forward market – Here the securities are traded for future
delivery and payment. This forward market is further subdivided
into:
i. Futures- In the futures market, securities are traded for
conditional future delivery.
ii. Options Market (Derivatives Markets) - The options market trades
two types of options.
a. Put option gives the owner the right but not the obligation to sell a
security to the writer of the option at a predetermined price before a
certain date.
b. Call option gives the buyer the right but not the obligation to
purchase a security from the writer of the option at a specific price
before a certain date.

Types Of Secondary Markets

1. Stock Exchange
• Stock exchanges are centralized platforms where securities are
traded without any contact between buyer and seller.
• Such platforms include the National Stock Exchange (NSE) and the
Bombay Stock Exchange (BSE).
• Securities trading transactions on stock exchanges are subject to
stringent regulations.
• A stock exchange acts as a guarantor, and counterparty risk is
virtually nonexistent.
• This safety net is obtained by levying a higher transaction cost on
investments in the form of commissions and exchange fees.
2. Over the counter (OTC) Market
• Over-the-counter markets are decentralised, with participants
trading among themselves.
• In the absence of regulatory oversight, OTC markets retain higher
counterparty risks because the parties deal directly with each other.
• An example of an over-the-counter market is the foreign exchange
market (FOREX).
• In an OTC market, there is fierce competition for acquiring more
volume. Because of this factor, the price of the securities varies from
one seller to another. Apart from the stock exchange and OTC
market, there are also auction markets and dealer markets.
3. Auction Market - It is essentially a platform for buyers and
sellers to agree on the price at which the securities will be traded.
Pricing information, including the offer's bidding price, is made
available to the public.
4. Dealer Market – In this market, various dealers indicate the
prices of specific securities for a transaction. Foreign exchange and
bonds are primarily traded in a dealer market.

Secondary Market Functions

• A stock exchange provides a trading platform for investors to trade
bonds, shares, debentures, and other financial instruments.
• Transactions can be entered into at any time, and the market
allows for active trading, allowing for immediate purchase or sale
with little price variation between transactions.
• Furthermore, there is consistency in trading, which increases the
liquidity of assets traded in this market.
• Investors locate a suitable platform, such as a regulated exchange,
to liquidate their holdings. They can sell the securities they own on
various stock exchanges.
• A secondary market serves as a medium for determining asset
pricing in a transaction that is consistent with demand and supply.
• The information about transaction prices is in the public domain,
allowing investors to make informed decisions.
• It is also indicative of a country's economy and serves as a link
between savings and investment. Savings are mobilized through
investments in the form of securities.

Secondary Market Benefits

• When investors require funds, the secondary market allows them
to recover a portion of their initial investment.
• The secondary market allows investors to earn a high return by
investing for a longer period of time.
• Investors can conveniently solve their liquidity problems in a
secondary market. For example, an investor in need of liquid cash
can easily sell the shares he or she owns because the secondary
market is flooded with buyers.
• The secondary market serves as a guideline for determining a
company's fair value.
• Price adjustments of securities in a secondary market occur quickly
in response to the availability of new information about the
company.
• Due to the strict regulations that govern the secondary stock
market, investors' funds are relatively safe.
• The regulations are strict because the market provides liquidity and
capital formation for both investors and businesses.
• When investors' money is held in the form of securities, it becomes
easier to mobilize savings.

Secondary Market Limitations

• Prices of securities in a secondary market are subject to high
volatility, which can result in a sudden and unexpected loss for
investors.
• Before buying or selling in a secondary market, investors must go
through the necessary procedures, which can be time-consuming.
• Brokerage commissions levied on each transaction of buying or
selling securities may reduce investors' profit margins.
• Investments in a secondary capital market are high risk due to the
influence of multiple external factors, and the current valuation can
change in a matter of minutes.

Role and functions of new issue market

The main function of the New Issue Market, i.e. channelling of
investible funds, can be divided, from the operational stand-point,
into a triple-service function:
(a) Origination (b) Underwriting (c) Distribution

The institutional setup dealing with these can be said to constitute

the New Issue Market organisation. Let us elucidate a little on all of
these.

(a) Origination :
Origination refers to the work of investigation and analysis and
processing of new proposals. This in turn may be:

(i) A preliminary investigation undertaken by the sponsors

(specialised agencies) of the issue. This involves a/careful study of
the technical, economic, financial and/legal aspects of the issuing
companies to ensure that/it warrants the backing of the issue house.
(ii) Services of an advisory nature which go to improve the quality of
capital issues. These services include/advice on such aspects of
capital issues as: determination of the class of security to be/issued
and price of the issue in terms of market conditions; the timing and
magnitude of issues; method of flotation; and technique of selling
and so on.

The importance of the specialised services provided by the New Issue

Market organisation in this respect can hardly be over-emphasized.
On the thoroughness of investigation and soundness of judgement of
the sponsoring institution depends, to a large extent, the allocative
efficiency of the market. The origination, however, thoroughly done,
will not by itself guarantee success of an issue. A second specialised
service i.e. “Underwriting” is often required.

(b) Underwriting:
The idea of underwriting originated on account of uncertainties
prevailing in the capital market as a result of which the success of the
issue becomes unpredictable. If the issue remains undersubscribed,
the directors cannot proceed to allot the shares, and have to return
money to the applicants if the subscription is below a minimum
amount fixed under the Companies Act. Consequently, the issue and
hence the project will fail.

Underwriting entails an agreement whereby a person/organisation

agrees to take a specified number of shares or debentures or a
specified amount of stock offered to the public in the event of the
public not subscribing to it, in consideration of a commission the
underwriting commission.

If the issue is fully subscribed by the public, there is no liability

attaching to the underwriters; else they have to come forth to meet
the shortfall to the extent of the under- subscription. The
underwriters in India may broadly be classified into the following two
types:
(i) Institutional Underwriters;

(ii) Non-Institutional Underwriting.

(c) Distribution :
The sale of securities to the ultimate investors is referred to as
distribution; it is another specialised job, which can be performed by
brokers and dealers in securities who maintain regular and direct
contact with the ultimate investors. The ability of the New Issue
Market to cope with the growing requirements of the expanding
corporate sector would depend on this triple-service function.

What is Flotation?
Flotation is the process of issuing and selling shares to public
investors. In other words, it is when a company goes public and
issues new shares to raise capital. It is a term commonly used in the
United Kingdom.Floating a company allows it to raise capital for the
purpose of acquiring external financing for equipment, research and
development (R&D), or new projects or to expand the business.

Methods of Floatation in Primary Market

The Capital Market consists of development banks, commercial

Banks and stock exchanges. There are various methods of floating
new issues in the primary market :

1) Offer through Prospectus

Offer through prospectus is the most popular method of raising

funds by public companies in the primary market. After a prospectus
is issued, the public subscribes to shares, debentures, etc. This
involves inviting subscription from the public through the issue of the
prospectus. A prospectus makes a direct appeal to investors to raise
capital, through an advertisement in newspapers and magazines. As
per the response, shares are prearranged to the public. If the
subscriptions are very high, the allocation will be done on lottery or
pro-rata basis.

It provides such information as the reason for which the fund is being
raised, the company’s background and upcoming projection, it’s a
precedent financial performance, etc.

2)Offer for Sale

Institutional investors like business enterprise funds, private equity

funds, etc., invest in an unlisted company when it is very small or at
an early stage. Under this method, securities are not issued directly
to the public but are offered for sale through intermediaries like
issuing houses or stock brokers.

Consequently, when the company becomes big, these investors sell

their shares to the public, through the issue of the offer document
and the company’s shares are listed in the stock exchange. This is
called an offer for sale. The advantage of this technique is that the
company need not be bothered about the printing and
advertisement of the prospectus, allocation of shares, etc.

3)Private Placement

A private placement is the allotment of securities by a company to

institutional investors and some selected individuals. Public offers
are an exclusive concern. The subsidiary cost of IPO’s lean to be very
high. This is why some companies favor not to go down this route. It
helps to raise capital more quickly than a public issue. They offer
investment opportunities to a select few individuals. The private
placement is the contradictory of a public issue, in which securities
are made accessible for sale on the open market.

So the company will sell its shares to economic institutes, banks,

insurance companies, and some select individuals. This will help
them raise the funds competently, rapidly and efficiently. Such
companies do not sell or offer their securities to the public at large.
Financial institutions, mutual funds, investment bank, etc. subscribe
to placement orders.

4)Rights Issue

Usually, when a company is looking to expand or are in need of

supplementary funds, they first turn to their present investors. This is
a privilege given to existing shareholders to subscribe to a new issue
of shares according to the terms and conditions of the company. So
the present shareholders are given a prospect to further invest in the
company. They are given the “right” to buy new shares before the
public is offered the chance.

Such shares are marketable in the market by the owners. Successful

companies assume this technique for fundraising. The rights issue is
advantageous to the company as the cost of issue is minimum.

5)e-IPOs

It stands for Electronic Initial Public Offer. A company proposing to

issue capital to the public through the online system of the stock
exchange has to enter into an agreement with the stock exchange.
When a company wants to offer its shares to the public it can now
also do so online. This is called an Initial Public Offer (IPO). An
agreement is signed between the company and the related stock
exchange known as the e-IPO. Issuing company also require to assign
registrar to have electronic connectivity with the exchange.

Mutual Fund Offer Document & KIM

Let’s start with OD. Offer document or a prospectus from a mutual
fund house is a document offering its scheme(s)to the public for
investing.

Offer document consists of two parts i.e. Statement of Additional

Information (SAI) and Scheme Information Document (SID).
SAI contains all statutory information of the Mutual Fund house like
its sponsor, offices, team etc.

SID carries important information about the scheme such as their

investment objective, asset allocation pattern, investment strategies,
the risk involved, benchmark indices for the respective scheme, who
will manage the scheme and fees & expenses; amongst a host of
others for making an informed investment decision.

Both SID and SAI are prepared in the format prescribed by SEBI.
These are submitted to SEBI and approved by them.

Some important section you should look

for
Asset Allocation: This section indicates how a particular mutual
fund scheme will allocate its assets (such as equity, debt, and
gold) under normal market conditions. It also provides a range is
provided indicating the minimum and maximum exposure to the
respective asset classes.

Benchmark: It is vital to know how a particular mutual fund

scheme benchmarks its performance. Essentially, a benchmark is
selected so that the suitable constituents of the same are structured
in the portfolio of the respective mutual fund scheme as well.
Risk factors: Risk as you may be aware, hampers the value of your
investment in the mutual fund scheme. So you should be aware of
the risk involved and evaluate whether you are willing to take risks.
Broadly the risks involved in mutual fund investing are Liquidity Risk,
Default Risk, Settlement Risk, Interest Rate Risk, Re-investment risk,
Economic Risk, Currency Risk, Political Risk etc.

Past Performance: Offer document of the respective schemes would

also contain details about their past performances over various time
frames. Past performance can be guidance while making
an investment decision, but should not be solely relied upon, as past
performance cannot be an indication of future performance.

Fees & Expenses: Net returns from a particular scheme is directly

proportional to the fees and expenses charged by the fund house. As
the mutual fund house has the objective of making money for you,
and it also makes money by charging levies (like exit loads), switching
charges and fund management fees. The charges and fees are
deducted from the respective scheme’s NAV and thus we should
look for a mutual fund scheme which has lower fees and expense
ratio.

Investment Options: The most common investment options

available under a mutual fund scheme are Growth and Dividend –
and under the Dividend option you have two sub-options namely,
the Dividend Pay-out option and Dividend Reinvestment Option. You
have different modes of investing, namely: lump sum Investment as
well as SIP (Systematic Investment Plan) and STP (Systematic
Transfer Plans).

Investor Grievance: Every fund has to disclose the status of investor

grievances in the Statement of Additional Information. The mutual
fund house has to reveal the number of queries and complaints
received & solved in what duration. This information shows
investors, how proactive and responsive a fund can be towards
investor grievances.

Penalties & pending litigation: Every fund has to disclose the

penalty imposed on the mutual fund house or the fund sponsor for
any economic offense or violation of any securities laws in the SID.

So, reading such aspects in the offer document will help you judge
the credibility of the fund house you are looking to trust with your
hard-earned money.

What is the role of a merchant banker?

A merchant banker usually refers to a firm or organization involved in
all aspects of issue management. Their services include providing
consultancy or advisory services to corporates for issue
management, making arrangements for buying, selling or subscribing
to shares in an issue or any other consultancy or services such as
underwriting, analysis and advice related to mergers and
acquisitions, arranging offshore funding or venture capital, credit
syndication and portfolio management.
In India, the Securities and Exchange Board of India (SEBI) classifies
merchant bankers into four categories based on permissible activity
and capital adequacy norms (see table below).

Category Activities Minimum net

worth
requirement

Category Act as Issue Rs.5 crore

1 Manager,
underwriter,
advisor,  consultant
or portfolio manager

Category Act as co-manager, Rs.50 lakhs

 2 underwriter, advisor,
consultant or
portfolio manager

Category Act as co-managers Rs.20 lakhs

3 without undertaking
portfolio
management

Category Only act as an Nil

4 advisor or consultant
for the issue
 

What services do Merchant Bankers

offer?
Merchant banking firms carry out a range of activities that help
enterprises mobilize funds from the capital markets.  These services
include preparing project reports, advising on the best suitable
financing structure, identification of sources for buying or selling
shares and negotiating with banks and financial institutions with
regard to a project’s viability through detailed analysis of the
financial, technical, marketing and commercial viability of the
enterprise. In addition, merchant bankers undertake underwriting
services for an issue, including registration of the offer
document, handling marketing and publicity for the issue, providing
underwriting support and listing on the stock exchanges. They also
take care of all formalities such as filling up applications and getting
approvals from the Government, regulatory bodies or financial
institutions.
How to choose a merchant banker?
As per SEBI regulations in India, it is mandatory for a merchant
banker to have a certificate of registration issued by SEBI, in order to
offer merchant banking services.Besides this, tying up with a certified
merchant banker, whose profile best suits the requirements of the
enterprise can play a crucial role in the raising capital.Here are some
guidelines on what to look for in a merchant banker.

 Proven track record: Choosing a merchant banker that has

experience in successfully managing at least one issue is
essential as they will know all the regulatory and legal
formalities that need to be taken care of for listing.
 Good investor relations: A merchant banker with good contacts
with investors, venture capitalists and financial institutions, can
help in mobilizing funds through successfully placing the
company’s shares.
 Industry focus: Opting for a merchant banking firm that has a
strong focus in the industry in which the enterprise operates
can make a difference as they are aware of the way the market
works in a particular sector.
 Research skills: Since there are several aspects to be looked at
before floating an IPO, the chosen merchant banker must have
the capabilities of thoroughly researching essential information
with regard to the company’s capital structuring, financial
viability and other elements that are important for the success
of the issue.
 Experience in market making: The selected merchant banker
should have the required skills and experience related to
market making, including the process involved in trading,
underwriting, buying, selling and marketing stocks.

Leading merchant bankers in India : In India, there are

public sector, private sector as well as foreign players in the
merchant banking industry. Some of the key players are listed below.
Public sector: SBI Capital Markets, Punjab National bank, IFCI
Financial Services
Private sector: ICICI Securities, Axis Bank, Bajaj Capital, Tata Capital
Markets, Yes Bank, Kotak Mahindra Capital Company, Reliance
Securities
Foreign merchant bankers: Goldman Sachs (India) Securities, Morgan
Stanley India, Barclays Securities (India), Bank of America, Citigroup
Global Markets India

Underwriting:
Underwriting is an agreement with or without conditions to
subscribe to the security of a body corporate when the existing
shareholders of such body corporate or the public don’t subscribe to
the securities offered to them. In other words, Underwriting is an
agreement or an assurance given by certain parties to the issuer
company to take up shares, debentures or other securities to a
specified extent in case the public subscription does not reach the
required or expected levels. The word Underwriting is derived from
the practice of accepting the “Risk”.
Underwriting is compulsory for a public issue. It is necessary for a
public company which invites public subscription in order to ensure
full subscription. The responsibility of the underwriter is to take up
the securities which are not fully subscribed in a public issue. The
underwriters make a commitment to get the shares or securities to
be subscribed either by themselves or by others.
Underwriting is generally done by banks, financial institutions,
Merchant bankers, Stock brokers.

 Underwriter:
An underwriter is to be registered with the SEBI (Securities and
Exchange Board of India) according to the provisions of Section 12 of
SEBI Act, 1991. A person can be registered with SEBI by making an
application in Form “A” of the Schedule – I to SEBI (Underwrites)
Regulation, 1993.
SEBI grants the permission for an entity to act as an Underwriter if:

 The application has the necessary and adequate infrastructure,

 The application has minimum 2 employees having the relevant
experience of underwriting,
  The application fulfils the capital adequacy requirements.
Capital Adequacy means net worth (Paid up share capital + free
reserves) net worth of an underwriter should be greater than
or equal to Rs.20 lakhs. In case of Merchant bankers, the capital
adequacy requirements will be as per the requirements of SEBI
Merchant bankers Regulation 1992 and in the case of
Stockholders, Capital adequacy requirements will be as per the
requirements of the stock exchange of which it is a member.
 The application or its directors has been not at anytime been
convicted of an offence involving moral turpitude or has been
found guilty of any economic offence,
 The applicant is a proper person.

 
SEBI after considering the above matters and after being satisfied
shall grant the Certificate of Registration in Form B of Schedule I to
SEBI (Underwriter) Regulations, 1993 and shall inform the applicant
accordingly.
Underwriters earn income by charging commission or premium or
spread on the price agreed upon.
According to the provisions of Section 40(6), “A company may pay
commission to any person in connection with the subscription to its
securities subject to such conditions as may be prescribed.” And the
provisions of Companies (Prospectus and Allotment of Securities)
Rules, 2014,
(a) The payment of such commission shall be authorized in the
company’s articles of association;
(b) The commission may be paid out of proceeds of the issue or the
profit of the company or both;
(c) The rate of commission paid or agreed to be paid shall not
exceed, in case of shares, five percent (5%) of the price at which the
shares are issued or a rate authorised by the articles, whichever is
less, and in case of debentures, shall not exceed two and a half per
cent (2.5 %) of the price at which the debentures are issued, or as
specified in the company’s articles, whichever is less;
(d) The prospectus of the company shall disclose –

 The name of the underwriters;

 The rate and amount of the commission payable to the
underwriter; and
 The number of securities which is to be underwritten or
subscribed by the underwriter absolutely or conditionally.

(e) There shall not be paid commission to any underwriter on

securities which are not offered to the public for subscription;
(f) A copy of the contract for the payment of commission is delivered
to the Registrar at the time of delivery of the prospectus for
registration.
Thus, the Underwriting commission is limited to 5% of issue price in
case of shares and 2.5% in case of debentures. The rates of
commission given above are maximum rates. The company is free to
negotiate lower rates with underwriters.
LEAD MANAGER
Lead managers are the independent financial bodies appointed by
the institution which is going public. The companies generally
appoint more than one lead managers who can manage a big
number of IPOs. these managers are also called as Book Running
Lead Manager or Co-Book Running Lead Managers.

Their main role of lead managers includes initiating the processing of

IPO, helping the company in roadshows, creating the draft offer
documents, and getting the drafts documents approved by stock
exchanges and SEBI. these lead managers also help the company to
list shares at stock market.

Lead managers are also known as investment bankers.

What Is a Registrar?
A registrar is an institution, often a bank or trust company,
responsible for keeping records of bondholders and shareholders
after an issuer offers securities to the public. When an issuer needs
to make an interest payment on a bond or a dividend payment to
shareholders, the firm refers to the list of registered owners
maintained by the registrar.

KEY TAKEAWAYS

 A registrar is a bank or a similar company that is responsible

for recordkeeping of bondholders and shareholders. 
 Registrars ensure shares outstanding don’t outpace shares
authorized. 
 There are other types of registrars that used for recordkeeping
in other industries, such as schools, governments, medicine,
and technology.

How a Registrar Works

One role of the registrar is to make sure the amount of shares
outstanding does not exceed the number of shares authorized in a
firm’s corporate charter. A corporation cannot issue more shares of
stock than the maximum number of shares that the corporate
charter discloses. Outstanding shares are those that shareholders
currently hold. 

A business may continue to issue shares periodically over time,

increasing the number of outstanding shares. The registrar accounts
for all issued and outstanding shares, as well as the number of
shares owned by each individual shareholder.

CHAPTER 2-STOCK EXCHANGE

Meaning of Stock Exchange
A stock exchange is an important factor in the capital market. It is a
secure place where trading is done in a systematic way. Here, the
securities are bought and sold as per well-structured rules and
regulations. Securities mentioned here includes debenture and share
issued by a public company that is correctly listed at the stock
exchange, debenture and bonds issued by the government bodies,
municipal and public bodies.
Typically bonds are traded Over-the-Counter (OTC), but a few
corporate bonds are sold in a stock exchange. It can enforce rules
and regulation on the brokers and firms that are enrolled with them.
In other words, a stock exchange is a forum where securities like
bonds and stocks are purchased and traded. This can be both an
online trading platform and offline (physical location).

Functions of Stock Exchange

Following are some of the most important functions that are
performed by  stock exchange:
1. Role of an Economic Barometer:  Stock exchange serves
as an economic barometer that is indicative of the state of
the economy. It records all the major and minor changes
in the share prices. It is rightly said to be the pulse of the
economy, which reflects the state of the economy.
2. Valuation of Securities: Stock market helps in the
valuation of securities based on the factors of supply and
demand. The securities offered by companies that are
profitable and growth-oriented tend to be valued higher.
Valuation of securities helps creditors, investors and
government in performing their respective functions.
3. Transactional Safety: Transactional safety is ensured as
the securities that are traded in the stock exchange are
listed, and the listing of securities is done after verifying
the company’s position. All companies listed have to
adhere to the rules and regulations as laid out by the
governing body.
4. Contributor to Economic Growth: Stock exchange offers a
platform for trading of securities of the various
companies. This process of trading involves continuous
disinvestment and reinvestment, which offers
opportunities for capital formation and subsequently,
growth of the economy.
5. Making the public aware of equity investment: Stock
exchange helps in providing information about investing in
equity markets and by rolling out new issues to encourage
people to invest in securities. 
6. Offers scope for speculation: By permitting healthy
speculation of the traded securities, the stock exchange
ensures demand and supply of securities and liquidity.
7. Facilitates liquidity: The most important role of the stock
exchange is in ensuring a ready platform for the sale and
purchase of securities. This gives investors the
 confidence that the existing investments can be converted
into cash, or in other words, stock exchange offers
liquidity in terms of investment.
8. Better Capital Allocation: Profit-making companies will
have their shares traded actively, and so such companies
are able to raise fresh capital from the equity market.
Stock market helps in better allocation of capital for the
investors so that maximum profit can be earned.
9. Encourages investment and savings: Stock market serves
as an important source of investment in various securities
which offer greater returns. Investing in the stock market
makes for a better investment option than gold and silver.

Features of Stock Exchange:

 A market for securities- It is a wholesome market where
securities of government, corporate companies, semi-
government companies are bought and sold.
 Second-hand securities- It associates with bonds, shares
that have already been announced by the company once
previously.
 Regulate trade in securities- The exchange does not sell
and buy bonds and shares on its own account. The broker
or exchange members do the trade on the company’s
behalf.
 Dealings only in registered securities- Only listed
securities recorded in the exchange office can be traded.
 Transaction- Only through authorised brokers and
members the transaction for securities can be made.
 Recognition- It requires to be recognised by the central
government.
  Measuring device- It develops and indicates the growth
and security of a business in the index of a stock
exchange.
 Operates as per rules– All the security dealings at the
stock exchange are controlled by exchange rules and
regulations and SEBI guidelines.

Limitations of Stock Exchange:

i. Lack of uniformity and control of stock exchanges.
ii. Absence of restriction on the membership of stock exchanges.
iii. Failure to control unhealthy speculation.
iv. Allowing more than one charge in the place.
v. Non-insistence of margin requirement in stock exchange or in the
case of produce exchanges.
vi. No proper regulation of listing of securities on the stock exchange.
STOCK MARKET MECHANISM

 Stocks represent ownership equity in the firm and give

shareholders voting rights as well as a residual claim on
corporate earnings in the form of capital gains and dividends.
 Individual and institutional investors come together on stock
exchanges to buy and sell shares in a public venue.
 Share prices are set by supply and demand as buyers and
sellers place orders.
 Order flow and bid-ask spreads are often maintained by
specialists or market makers to ensure an orderly and fair
market.
 Listing on exchanges may provide companies with liquidity and
the ability to raise capital but it can also mean higher costs and
increased regulation.
Different Stock Order Types

1. Market Orders
A market order is an order in which the transaction to buy or sell
takes place at the current market price. Therefore, when you want to
buy a stock and put a market order, the execution of the transaction
will take place at or close to the ASK price. Likewise, when you place
an order to sell a stock and put a market order, the execution of the
transaction will take place or close to the BID price.

To put it in simple words, a market order executes a transaction at

the best price available when the transaction takes place. As a
trader, you must be careful while placing the market order because
in some stocks the bid/asks spread may be very wide which
ultimately would mean that you would not get a good price for the
trade.

2. Limit Orders
A limit order is one in which you get the option to buy or sell the
stock when it reaches a particular price level. Like for example, a
limit order for buying stock would take place only when the stock
reaches the given or lower price level set in the order. Similarly, a
limit order for selling stock would take place only when the stock
reaches the given or higher price level set in the order.

Like for example you want to sell 100 shares of Reliance Industries at

Rs. 1500 but the current price is Rs. 1480 than you can place a limit
order. If suppose you put the limit order to sell Reliance Industries at
Rs. 1500, the trade would execute only when the price will reach Rs.
1500 and otherwise the order would not execute at a price below it.

Limit orders are meant for regular traders who have experience of
trading in the market and good control over it. The limit order can be
put during the pre-open and post-market hours as well.
3. Stop Orders
Stop loss orders are like an insurance policy that triggers only on the
happening of a certain event. A stop loss order is meant to control or
limit the loss on a stock. You can place this order with the broker to
buy or sell any stock after the stock reaches a particular price level.

The stop orders are of two types; Stop market orders and stop limit
orders. A stop market order is one that automatically sells your
holding at the market price when the price reaches that or below
levels. On the other hand, stop limit order ensures that you do end
up selling or purchasing a stock below or above the price given in the
order. The stop limit order will execute exactly at the price given in
the order.

Stop orders are an important tool to limit the loss and traders must
always ensure that they have a stop loss in place. With a stop loss in
place the losses will be minimal and you will be able to get out of bad
trades at an early time.

4. Trailing Stop Orders

Trailing stop orders are rarely put in use by the traders but they are
equally important. The whole purpose of putting a trailing stop loss
order is to protect yourself from the downside in the stock price and
along with that you have the room to close your trade in profits.
This type of order is useful when you already hold stocks that are
profitable and you can safeguard the profit the putting a trailing stop
loss. This type of stop loss must be put after carrying out
proper technical analysis for intraday trading.

5. Conditional Orders
This type of order is for sophisticated traders. The conditional orders
allow the traders to pre-set their entry and exit strategies. The
conditional traders are of multiple types that include; Contingent,
Multi-Contingent, One-Triggers-the-Other (OTO), One-Cancels-the-
Other (OCO) and One-Triggers-a-One-Cancels-the-Other (OTOCO).
What is screen-based trading system
(SBTS)
Before the NSE was set up, trading on the stock exchanges in India
used to take place through open outcry without use of information
technology for immediate matching or recording of trades. This was
time consuming and inefficient. The practice of physical trading
imposed limits on trading volumes as well as, the speed with which
new information was incorporated into prices.
To obviate this, the NSE introduced screen-based trading system
(SBTS) where a member can punch into the computer the quantities
of shares and the prices at which he wants to transact. The
transaction is executed as soon as the quote punched by a trading
member finds a matching sale or buys quote from counterparty.
SBTS electronically matches the buyer and seller in an order-driven
system or finds the customer the best price available in a quote-
driven system, and hence cuts down on time, cost and risk of error as
well as on the chances of fraud.
Benefits of SBTS:

 SBTS enables distant participants to trade with each other,

improving the liquidity of the markets.
 The high speed with which trades are executed and the large
number of participants who can trade simultaneously allows
faster incorporation of price-sensitive information into
prevailing prices.
 This increases the informational efficiency of markets. With
SBTS, it becomes possible for market participants to see the full
market, which helps to make the market more transparent,
leading to increased investor confidence
 The NSE started nation-wide SBTS, which have provided a
completely transparent trading mechanism. Regional
exchanges lost a lot of business to NSE, forcing them to
introduce SBTS
WHAT IS INTERNET TRADING?
Internet trading (also called “online trading”, “electronic trading” or
“investing online”) is a method of trading currencies, financial
securities and derivatives. It is based on electronic trading platforms
and networks with use of brokerage.
Internet based trading was increased with the rapid development of
speed and access of internet connections. Nowadays Internet trading
is almost a commonplace and almost everyone can afford it.
There are many advantages of Internet trading, which allowed it to
replace phone trading and floor trading. Internet trading gives
brokers an opportunity to cut their costs and make commissions for
customers lower. Besides, an electronic format provide a high speed
of setting and execution of trades. Although glitches and cancelled
trades still take place. The main benefit is that the market is now
much more accessible than it was earlier.
Anyone who has an internet aссess can open an account and trade
even with a small amount of money. This gives casual traders almost
full control over their investments. In spite of the fact that customers
can set orders for trades via the Internet, but they do not have direct
access to the markets. A market order execution is only possible with
use of a brokerage firm.
Trading on the Internet includes buying and selling stocks, bonds,
options, futures and currencies.
The world’s largest financial market is the foreign exchange market
(Forex). The three major stock exchanges are the York Stock
Exchange, the NASDAQ (National Association of Securities Dealers
Automated Quotations) and the Tokyo Stock Exchange. The stock
exchanges are more popular among media, but the bond market is
many times bigger.
Internet trade may be quite risky. For example, before start trading
on Forex you should understand how the market, a broker and
a margin account works.
LISTING OF SECURITIES IN INDIAN
STOCK MARKET
For trading in the stock market, a company has to list its securities in
the stock exchange. It means that the name of the company is
registered in the stock exchange. The company has to fulfill certain
conditions according to Companies Act. The company has to offer its
shares or debentures to the public for subscription. Only then, the
company will be allowed to list its security in the stock exchange. For
listing shares in the stock exchange, a company must have minimum
of Rs. 5 crores as its equity capital and 60% of this i.e., Rs. 3 crores is
offered to the public.
Conditions for Listing
Before listing securities, a company has to fulfill the following
conditions:

1. Shares of the company must be offered to the public through a

prospectus and 25% of each class of securities must be offered.

2. The prospectus should clearly mention opening of subscription,

receipt of application, etc.

3. The capital structure of the company should be broad-based and

there should-be public interest in securities.

4. The minimum issued capital must be Rs. 3 crores of which Rs. 1.80
crores must be offered to the public.

5. There must be at least five public shareholders for every Rs. 1 lakh
of fresh issue of capital and 10 shareholders for every Rs. 1 lakh of
offer for sale of existing capital. On the excess application money, the
company will have to pay interest from 4% to 15%, if there is delay in
refund and delay should not be more than 10 weeks from the date of
closure of subscription list.
6. A company with paid up capital of more than Rs. 5 crores should
get itself listed in more than one stock exchange, it includes the
compulsory listing on regional stock exchange.

7. The auditor or secretary of the company applying for listing should

declare that the share certificates have been stamped so that shares
belonging to the promoter’s quota cannot be sold or hypothecated
or transferred for a period of 5 years.

8. Articles of Association of the company must have the following

provisions:

 A common form of transfer shall be used

 Fully paid shares shall be used
 No lien on fully paid shares
 Calls paid in advance will not carry a right to dividend and
will not be forfeited before the claim becomes time-
barred.
 Option to call off shares shall be given only after sanction
by the general meeting.
9. Letter of allotment, Letter of regret and letter of rights shall be
issued simu1taneously.

10. Receipts for all the securities deposited, whether for registration
or split and no charges will be made for the services.

11. The company will issue consolidation and renewal certificates for
split certificate, letter of allotment, letter of rights and transfer, etc.
when required.

12. The stock exchange should be notified by the company regarding

the date of board meeting, change in the composition of board of
directors, and any new issue of securities, in place of reissue
of forfeited shares.
13. Closing the transfer books for the purpose of declaration of
dividend, rights issue or bonus issue. And for this purpose, due notice
should be given to stock exchange.
14. Annual return of the company to be filed soon after the annual
general body meeting.

15. The company will have to comply with conditions imposed by the
stock exchange now and then for 1istmg of security.

Types of Listing of Securities

1. Initial listing: Here, the shares of the company are listed for the
first time on a stock exchange.
2. Listing for public Issue: When a company which has listed its
shares on a stock exchange comes out with a public issue.
3. Listing for Rights Issue: When the company which has already
listed its shares.in the stock exchange issues securities to the existing
shareholders on rights basis.
4. Listing of Bonus shares: When a listed company in a stock
exchange is capitalizing its profit by issuing bonus shares to the
existing shareholders.
5. Listing for merger or amalgamation: When the amalgamated
company issues new shares to the shareholders of amalgamated
company, such shares are listed.
Procedure for listing requirements
For listing the shares in the stock exchange, the public limited
company will have to submit supporting documents. They are:

1. Certified copies of Memorandum, Articles of

Association, prospectus and agreements with Underwriters.
2. All particulars regarding capital structure.
3. Copies of advertisements offering securities for sale during the last
5 years.

4. Copies of Balance sheet, audited accounts and auditors’ report for

the last 5 years.

5. Specimen copies of shares and debentures, certificate letter of

allotment, and letter of regret.
6. A brief history of the company since incorporation with any
changes in capital structure, borrowings, etc.

7. Details of shares and debentures issued for consideration other

than cash.

8. Statement showing distribution of shares and particulars of

commission, brokerage, discounts or special terms towards the issue
of shares.

9. Any agreement with financial institutions.

10. Particulars of shares forfeited.

11. Details of shares or debentures for which permission to deal with

is applied for.

12. Certified copy of consent from SEBI.

Procedure at the Stock Exchange

After the application is made the Listing Committee of the stock
exchange will scrutinize the application form of the company.
Here, the stock exchange will ensure the following—

1. The financial position of the company is sound

2. Solvency and liquidity positions are good

3. The issue is large and broad based to generate public interest.

If the application for listing is accepted, the listed company will
be called to execute listing agreement with the stock exchange.
The company must follow certain obligations which are:

 the company will treat all the applications with equal

fairness.
 in case of over subscription, the allotment will be
decided in consultation with stock exchanges; and
 the company will notify to the stock exchange any
change in its management, business, capital structure
or bonus or rights issue of shares.