Money Market

The money market is a crucial financial market segment where short-term borrowing and
lending of funds occur. It facilitates the smooth functioning of the economy by providing a
platform for participants to meet their immediate cash needs and manage liquidity. The
participants in the money market include governments, corporations, financial institutions,
and individual investors. Transactions in the money market typically involve highly liquid
and low-risk instruments with maturities of one year or less.

How Does The Money Market Work?

The money market operates through the interaction of various participants, including
governments, corporations, financial institutions, and individual investors. These participants
engage in short-term borrowing and lending to meet their immediate cash needs and manage
liquidity. Here’s a breakdown of how the money market works:
 Borrowers: Entities needing short-term funds, such as governments or corporations,
approach the money market to meet their immediate financial obligations. They issue
money market instruments to raise funds quickly. These instruments act as a form of
borrowing from investors.
 Money Market Instruments: Borrowers issue various instruments with varying
maturities, interest rates, and credit ratings. These instruments include Treasury bills,
commercial paper, certificates of deposit, and repurchase agreements. These
instruments are highly liquid and considered low risk.
 Investors: Investors with surplus funds seeking short-term investment opportunities
turn to the money market. They purchase money market instruments issued by
borrowers. In return, investors receive interest payments or discounts on the tools,
which serve as their returns on investment.
 Trading and Secondary Market: Money market instruments can be traded on the
secondary market, allowing investors to buy and sell them before maturity. This
secondary market enhances liquidity, as investors can access their funds before the
instrument matures.
 Money Market Funds: Money market funds pool investments from institutional and
individual investors and invest in a diversified portfolio of money market instruments.
These funds allow investors to indirectly participate in the money market while
benefiting from professional management.
 Regulatory Oversight: The money market operates within a regulated environment.
Regulatory bodies monitor and enforce rules and regulations to ensure transparency,
stability, and fair practices. This oversight helps maintain the integrity and reliability
of the money market.

Who Uses The Money Market?

Various participants utilize the money market, including governments, corporations, financial
institutions, and individual investors. Let us look at each of these groups and their
involvement in the money market:
 Governments: Governments often play a significant role in the money market. They
issue money market instruments, such as Treasury bills, to finance their short-term
funding requirements. These instruments are considered highly secure, backed by the
government’s creditworthiness.

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  Corporations: Large and tiny corporations utilize the money market to meet short-
term funding needs. They issue commercial paper, which represents unsecured
promissory notes, to raise funds for operational expenses, inventory management, or
capital investments.
 Financial Institutions: Banks and other financial institutions actively participate in
the money market. They use money market instruments to manage their liquidity and
meet regulatory requirements. Financial institutions also invest in money market
instruments as a source of income to ensure the stability of their cash positions.
 Individual Investors: Individual investors, including retail investors, also engage
with the money market. They can invest in money market instruments such as
Treasury bills, certificates of deposit, or money market funds offered by banks or
investment firms. These investments provide individuals with a safe and short-term
avenue to park their surplus funds or earn modest returns.
 Money Market Funds: These are investments that pool funds from individual and
institutional investors. Professional investment managers oversee managing these
funds, and they distribute the pooled funds among various money market instruments.
Money market funds provide investors with a convenient way to access the money
market and benefit from diversification.
 Central Banks: They play a crucial role in the money market by conducting
monetary policy operations. They use tools such as open market operations to buy or
sell money market instruments to manage the money supply, influence interest rates,
and stabilize financial markets.

Features Of Money Market Instruments

1. High Liquidity- One of the key features of these financial assets is high liquidity
offered by them. They generate fixed-income for the investor and short term maturity
makes them highly liquid. Owing to this characteristic money market instruments are
considered as close substitutes of money.
2. Secure Investment- These financial instruments are one of the most secure
investment avenues available in the market. Since issuers of money market
instruments have a high credit rating and the returns are fixed beforehand, the risk of
losing your invested capital is minuscule.
3. Fixed returns- Since money market instruments are offered at a discount to the face
value, the amount that the investor gets on maturity is decided in advance. This
effectively helps individuals in choosing the instrument which would suit their needs
and investment horizon.

Types Of Instruments Traded In The Money Market

1. Treasury bills- are short term borrowing instruments issued by the Government of
India. These are the oldest money market instruments that are still in use. The
Treasury bill does not pay any interest, but are available at a discount of face value at
the time of issue. Treasury Bills can be classified in two ways i.e. based on maturity
and bases on type. These are the safest instruments as they are backed by a
government guarantee. The rate of return, also known as risk-free rate, is low for
treasury bills like T-364, T-182 and so on, as compared to all other instruments.

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 2. Commercial papers- commercial papers is an unsecured money market instruments
issued in the form of promissory note. It was introduced In India in 1990 with the
objectives of enabling corporate borrowers diversify their sources of short-term
borrowing and to provide an additional investment instrument to investors.
Commercial paper is a money-market security issued (sold) by large corporations to
obtain funds to meet short-term debt obligations and is backed only by an issuing
bank or company’s promise to pay the face value on the maturity date specified on the
note.
3. Certificate of Deposit- A certificate of deposit (CD) is issued directly by a
commercial bank, but it can be purchased through brokerage firms. It comes with a
maturity date ranging from three months to five years and can be issued in any
denomination. Most CDs offer a fixed maturity date and interest rate, and they attract
a penalty for withdrawing prior to the time of maturity. Just like a bank’s checking
account, a certificate of deposit is insured by the Federal Deposit Insurance
Corporation (FDIC).
4. Banker’s acceptance- a banker’s acceptance is a document that promises future
payment that is guaranteed by the commercial bank. It is considered to be a very safe
investment option and is widely used in foreign trade, bankers acceptance are time
drafts which are accepted and guaranteed by the banks and drawn on a deposit at the
bank. The maturity period of banker’s acceptance can range from 30 to 180 days.
5. Repurchase Agreements- Also known as repos or buybacks, Repurchase Agreements
are a formal agreement between two parties, where one party sells a security to
another, with the promise of buying it back at a later date from the buyer. It is also
called a Sell-Buy transaction. The seller buys the security at a predetermined time and
amount which also includes the interest rate at which the buyer agreed to buy the
security.

Function Of Money Market

1. Provides funds– the money market provides short term funds for borrowing at a
lower rate of interest. The private and the public institutions can borrow money from
the money market to finance capital requirements and fund business growth through
the system of finance bills and commercial paper. The govt. can also borrow funds the
money market by issuing treasury bills. However, money market issues money market
instruments like commercial papers, treasury bills and so on and helps in development
of trade, industry and commerce within and outside India.
2. Central Bank Policies- The central bank is responsible for guiding the monetary
policy of a country and taking measures to ensure a healthy financial system. Through
the money market, the central bank can perform its policy-making function
efficiently.For example, the short-term interest rates in the money market represent
the prevailing conditions in the banking industry and can guide the central bank in
developing an appropriate interest rate policy. Also, the integrated money markets
help the central bank to influence the sub-markets and implement its monetary policy
objectives.
3. Helps government- the money market instruments helps the government raise money
for financing government projects for public welfare and infrastructure development.
The govt. can borrow short term funds by issuing treasury bills at low interest rates.

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 On the other hand, if the government were ton issue paper money or borrow short
term funds by issuing treasury bills at low interest rates. On the other hand, if the
govt. were to issue paper money or borrow from the central bank, it would lead to
inflation in the economy.
4. Helps in Financial Mobility- the money market helps in financial mobility by
enabling easy transfer of funds from one sector to the other. Financial mobility is
essential for the development of industry and commerce in the economy.
5. Promote Liquidity and Safety- this is one of the most important functions of money
market, as it provides safety and liquidity of funds. It also encourages saving and
investments. These investments instruments have shorter maturity which means they
can readily be converted to cash. The money market instruments are issues by entities
with good credit score which a=makes them safe investment option.
6. Economy in use of cash- as the money market deals in near-money assets and not
proper money; it helps in economizing the use of cash. It provides a convenient and
safe way of transferring funds from one place to another, there by immensely helps
commerce and industry in India.

Advantages And Disadvantages Of Money Markets

Advantages:
 Liquidity: Money market instruments are highly liquid, meaning they can be easily
bought or sold with minimal impact on market value. This allows investors to access
their funds quickly, providing flexibility and ease of cash management.
 Safety: Money market instruments are generally considered low risk. They frequently
come from respectable institutions like governments and reputable businesses, which
lowers the risk of default. This makes money market investments a relatively safe
option for preserving capital.
 Stable Returns: Money market instruments offer stable and predictable returns. They
typically provide interest payments or discounts at maturity, allowing investors to earn
a modest return on their investments. This makes money market investments suitable
for those seeking stability and capital preservation.
 Diversification: Money market instruments provide an opportunity for portfolio
diversification. Investing in various money market instruments with varying
maturities and issuers can spread their risk and reduce exposure to any single entity or
maturity date.
 Short-Term Financing: For borrowers, money markets offer a convenient and
efficient source of short-term financing. Governments, corporations, and financial
institutions can issue money market instruments to raise funds quickly and meet their
immediate cash flow needs. This enables them to bridge temporary funding gaps and
manage liquidity effectively.

Disadvantages:
 Lower Returns: While money market investments offer stability, they generally
provide lower returns than other investment options, such as stocks or long-term
bonds. The conservative nature of money market instruments translates to a lower
potential for significant capital appreciation or high yields.

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  Inflation Risk: Money market investments may be susceptible to inflation risk. If the
interest rates on money market instruments fail to keep pace with inflation, the real
value of the investment can erode over time. This can impact the purchasing power of
the investor’s funds.
 Limited Growth Potential: Money market investments may not provide significant
opportunities for capital growth. These instruments primarily focus on capital
preservation and short-term liquidity management, making them less suitable for
investors seeking substantial growth or long-term wealth accumulation.
 Regulatory Changes: Money market investments can be subject to regulatory
changes, which may impact their performance and liquidity. Changes in regulations
governing money market funds or the issuers of money market instruments can
introduce uncertainties and affect the attractiveness of these investments.
 Market Conditions: Current market conditions, such as interest rate fluctuations and
market volatility, can have an impact on money market investments. Changes in
interest rates can affect the yields on money market instruments, potentially impacting
returns for investors.
 Limited Investment Options: Money markets provide a narrower range of
investment options than broader financial markets. Investors looking for more diverse
investment opportunities or higher potential returns may need to explore other
financial market segments.

Capital Markets
A capital market is a platform for channelling savings and investments among suppliers and
those in need. An entity with a surplus fund can transfer it to another that needs capital for its
business purpose through this platform.

Typically, suppliers include banks and investors who offer capital for lending or investing.
Businesses, governments, and individuals seek capital in this market. A capital market aims to
improve transaction efficiency by bringing together suppliers and investors and facilitating
their share exchange.
A capital market is a broad term for the physical and online spaces where financial
instruments are traded. Stock markets, bond markets, and currency markets (forex) are all
types of capital markets. They facilitate the sale and purchase of equity shares, debentures,
preference shares, zero-coupon bonds, and debt instruments.

How Does a Capital Market Work?

After discussing the capital market definition, let’s find out how the capital market works.
Capital markets assist economies by providing a platform for raising funds to operate
businesses, develop projects, or enhance wealth. Capital markets function according to the
circular flow of money theory.
Typically, capital markets are used for selling financial products such as stocks and bonds.
Stocks, or ownership shares of a company, are equities. A bond is an interest-bearing IOU, as
are other debt securities.

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A firm, for example, borrows money from households or individuals for business operations.
Individuals or households invest money in a company's shares or bonds in the capital
markets. In exchange for their investment, investors gain profits and goods.
The capital market consists of finance suppliers and buyers, as well as trading instruments
and mechanisms. Regulatory bodies are also present.

Types of Capital Market

Now that we’ve covered “what is capital market,” let’s discuss its types. There are two main
categories of capital markets: Primary markets and secondary markets.
Primary Markets
Primary capital markets are where companies first sell new stock or bonds publicly. Also
known as the 'New Issues Market', it is a place where businesses and governments seek out
new financing. The new money is converted into debt or shares of the company. Debt or
stocks are locked in until they are sold on a secondary market, repurchased by the company,
or mature.
Primary capital markets trade two major financial instruments: equities (stocks) and debt.
An Initial Public Offering (IPO) is the process of introducing new equities to the market. It's
simply the process of selling part of a company to the public for capital.
Bonds, on the other hand, are a bit more complicated. Underwriters act as intermediaries in
the issuance of bonds. If Company A wants to issue INR 10 crore in bonds, it goes to the
underwriter. These bonds are then issued and sold by the underwriter to investors.
In this instance, the underwriter is responsible for ensuring that Company A gets the capital it
needs. A bond underwriter buys bonds from Company A and then sells them on the market -
typically at a higher price. The underwriter then takes on the risk, but Company A receives
the entire loan.

Secondary Market
Investors trade old debt or stocks on the secondary capital market. It differs from the primary
market because the debt has already been issued here.
Investors trade stock in the secondary capital markets through exchanges such as the Bombay
Stock Exchange, the Calcutta Stock Exchange, and the New York Stock Exchange. A stock
exchange also allows people to sell the old stock if they no longer want it, which results in
the 'liquidation' of these stocks. Thus, the seller now has cash rather than an asset.
Unlike stocks, bonds are typically held for a longer period - usually until they expire.
However, those who hold bonds but need cash quickly can rely on the secondary market.
Investors use the secondary market to obtain cash, either to invest in another stock or for
personal consumption. It involves liquidating assets so that other things can be purchased.

Elements of a Capital Market

● Market sources of funds include individual investors, financial institutions, insurance

companies, commercial banks, businesses, and retirement funds.
● Investors invest money intending to make capital gains as their investments grow over
time. They also receive dividends, interest, and ownership rights.
● Fund-seekers include companies, entrepreneurs, governments, etc. For example, to fund
the economy and development projects, the government issues bonds and deposits.

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 ● These markets usually trade long-term investments such as stocks, bonds, debentures, and
government securities. Moreover, hybrid securities like convertible debentures and preference
shares are available.
● The market is primarily operated by stock exchanges. Brokerage firms, investment banks,
and venture capitalists are other intermediaries.
● The regulatory bodies are responsible for monitoring and eliminating any illegal activities
in the capital market. Securities and Exchange Commission, for example, oversees stock
exchange operations.

Functions of Capital Market

1. Links Borrowers and Investors: Capital markets serve as an intermediary between
people with excess funds and those in need of funds.
2. Capital Formation: The capital market plays an important role in capital formation.
By timely providing sufficient funds, it meets the financial needs of different sectors
of the economy.
3. Regulate Security Prices: It contributes to securities' stability and systematic pricing.
The system monitors whole processes and ensures that no unproductive or speculative
activities occur. A standard or minimum interest rate is charged to the borrower. As a
result, the economy's security prices stabilize.
4. Provides Opportunities to Investors: The capital markets have enough financial
instruments to meet any investor's needs, regardless of the risk level. Capital markets
also provide investors with the opportunity to increase their capital yields. The
interest rate on most savings accounts is extremely low compared to the rate on
equities. Therefore, investors can earn a higher rate of return on the capital market,
though some risks are involved as well.
5. Minimises Transaction Cost And Time: Long-term securities are traded on the
capital market. The whole trading process is simplified and reduced in cost and time.
A system and program automate every aspect of the trading process, thus speeding up
the entire process.
6. Capital Liquidity: The financial markets allow people to invest their money. In
exchange, they receive ownership of a stock or bond. Bond certificates cannot be used
to purchase a car, food, or other assets, so they may need to be liquidated. Investors
can sell their assets for liquid funds to a third party on the capital markets.
Money Markets Vs. Capital Markets: Understanding The Differences
In finance, two key market segments play distinct roles in facilitating the flow of funds and
supporting economic activities: the money market and the capital market. While both markets
serve essential functions, they differ regarding the types of securities traded, their investment
horizons, and the nature of participants. Let’s delve into the dissimilarities between money
markets and capital markets:

Differences between Money Market and Capital Market

Money Market Capital Market
Definition
A random course of financial institutions, bill A kind of financial market where the company or
brokers, money dealers, banks, etc., wherein government securities are generated and patronised
dealing on short-term financial tools are being with the intention of establishing long-term

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settled is referred to as Money Market. finance to coincide with the capital necessary is
called Capital Market.
Market Nature
Money markets are informal in nature. Capital markets are formal in nature.
Instruments involved
Commercial Papers, Treasury Certificate of Bonds, Debentures, Shares, Asset Secularisation,
Deposit, Bills, Trade Credit, etc. Retained Earnings, Euro Issues, etc.
Investor Types
Commercial banks, non-financial institutions, Stockbrokers, insurance companies, Commercial
central bank, chit funds, etc. banks, underwriters, etc.
Market Liquidity
Money markets are highly liquid. Capital markets are comparatively less liquid.
Risk Involved
Money markets have low risk. Capital markets are riskier in comparison to money
markets.
Maturity of Instruments
Instruments mature within a year. Instruments take longer time to attain maturity
Purpose served
To achieve short term credit requirements of the To achieve long term credit requirements of the
trade. trade.
Functions served
Increasing liquidity of funds in the economy Stabilising economy by increase in savings
Return on investment achieved
ROI is usually low in money market ROI is comparatively high in capital market

Primary Market
In a Primary Market, securities are created for the first time for investors to purchase. New
securities are issued in this market through a stock exchange, enabling the government as
well as companies to raise capital.
For a transaction taking place in this market, there are three entities involved. It would
include a company, investors, and an underwriter. A company issues security in a primary
market as an initial public offering (IPO), and the sale price of such a new issue is determined
by a concerned underwriter, which may or may not be a financial institution.
An underwriter also facilitates and monitors the new issue offering. Investors purchase the
newly issued securities in the primary market. Such a market is regulated by the Securities
and Exchange Board of India (SEBI).
The entity which issues securities may be looking to expand its operations, fund other
business targets or increase its physical presence among others. Primary market example of
securities issued include notes, bills, government bonds or corporate bonds as well as stocks
of companies.

Functions of Primary Market

The functions of such a market are manifold –
 New Issue Offer

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The primary market organises offer of a new issue which had not been traded on any other
exchange earlier. Due to this reason, it is also called a New Issue Market.
Organising new issue offers involves a detailed assessment of project viability, among other
factors. The financial arrangements for the purpose include considerations of promoters’
equity, liquidity ratio, debt-equity ratio and requirement of foreign exchange.
 Underwriting Services
Underwriting is an essential aspect while offering a new issue. An underwriter’s role in a
primary marketplace includes purchasing unsold shares if it cannot manage to sell the
required number of shares to the public. A financial institution may act as an underwriter,
earning a commission on underwriting.
Investors rely on underwriters for determining whether undertaking the risk would be worth
its returns. It may so happen that an underwriter ends up buying all the IPO issue, and
subsequently selling it to investors.
 Distribution of New Issue
A new issue is also distributed in a primary marketing sphere. Such distribution is initiated
with a new prospectus issue. It invites the public at large to buy a new issue and provides
detailed information on the company, issue, and involved underwriters.

Types of Primary Market Issuance

After the issuance of securities, investors can purchase such securities in various ways. There
are 5 types of primary market issues.
 Public Issue
Public issue is the most common method of issuing securities of a company to the public at
large. It is mainly done via Initial Public Offering (IPO) resulting in companies raising funds
from the capital market. These securities are listed in the stock exchanges for trading.
A privately held company converts into a publicly-traded company when its shares are
offered to the public initially through IPO. Such a public offer allows a company to raise
funds for expansion of business, improving infrastructure, and repaying its debts, among
others.
Trading in an open market also increases a company’s liquidity and provides a scope for
issuance of more shares in raising further capital for business.
The Securities and Exchange Board of India is the regulatory body that monitors IPO. As per
its guidelines, a requisite due enquiry is conducted for a company’s authenticity, and the
company is required to mention its necessary details in the prospectus for a public issue.
 Private Placement
When a company offers its securities to a small group of investors, it is called private
placement. Such securities may be bonds, stocks or other securities, and the investors can be
both individual and institutional.
Private placements are easier to issue than initial public offerings as the regulatory
stipulations are significantly less. It also incurs reduced cost and time, and the company can
remain private.
Such issuance is suitable for start-ups or companies which are in their early stages. The
company may place this issuance to an investment bank or a hedge fund or place before ultra-
high net worth individuals (HNIs) to raise capital.
 Preferential Issue

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A preferential issue is one of the quickest methods available to companies for raising capital.
Both listed and unlisted companies can issue shares or convertible securities to a select group
of investors. However, the preferential issue is neither a public issue nor a rights issue.
The shareholders in possession of preference shares stand to receive the dividend before the
ordinary shareholders are paid.
 Qualified Institutional Placement
Qualified institutional placement is another kind of private placement where a listed company
issues securities in the form of equity shares or partly or wholly convertible debentures apart
from such warrants convertible to equity shares and purchased by a Qualified Institutional
Buyer (QIB).
QIBs are primarily such investors who have the requisite financial knowledge and expertise
to invest in the capital market.
Some QIBs are –
 Foreign Institutional Investors registered with the Securities and Exchange Board of
India.
 Foreign Venture Capital Investors.
 Alternate Investment Funds.
 Mutual Funds.
 Public Financial Institutions.
 Insurers.
 Scheduled Commercial Banks.
 Pension Funds.
Issuance of qualified institutional placement is simpler than preferential allotment as the
former does not attract standard procedural regulations like submitting pre-issue filings to
SEBI. The process thus becomes much easier and less time-consuming.
 Rights and Bonus Issues
Another issuance in the primary market is rights and bonus issue, in which the company
issues securities to existing investors by offering them to purchase more securities at a
predetermined price (in case of rights issue) or avail allotment of additional free shares (in
case of bonus issue).
For rights issues, investors retain the choice of buying stocks at discounted prices within a
stipulated period. Rights issue enhances control of existing shareholders of the company, and
also there are no costs involved in the issuance of these kinds of shares.
For bonus issues, stocks are issued by a company as a gift to its existing shareholders.
However, the issuance of bonus shares does not infuse fresh capital.

Advantages of Primary Market

 Companies can raise capital at relatively low cost, and the securities so issued in the
primary market provide high liquidity as the same can be sold in the secondary market
almost immediately.
 The primary market is an important source for mobilisation of savings in an economy.
Funds are mobilised from commoners for investing in other channels. It leads to
monetary resources being put into investment options.
 The chances of price manipulation in the primary market are considerably less when
compared to the secondary market. Such manipulation usually occurs by deflating or

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 inflating a security price, thereby deliberately interfering with fair and free operations
of the market.
 The primary market acts as a potential avenue for diversification to cut down on risk.
It enables an investor to allocate his/her investment across different categories
involving multiple financial instruments and industries.
 It is not subject to any market fluctuations. The prices of stocks are determined before
an initial public offering, and investors know the actual amount they will have to
invest.

Disadvantages of Primary Market

 There may be limited information for an investor to access before investment in an
IPO since unlisted companies do not fall under the purview of regulatory and
disclosure requirements of the Securities and Exchange Board of India.
 Each stock is exposed to varying degrees of risk, but there is no historical trading data
in a primary market for analysing IPO shares because the company is offering its
shares to the public for the first time through an initial public offering.
 In some cases, it may not be favorable for small investors. If a share is
oversubscribed, small investors may not receive share allocation.
With this information regarding the primary market, individuals can make a well-thought-out
decision regarding investment in the market. It also makes way for the creation of an
investment portfolio with diversified risk.

IPO
Understanding Public Issue/Offer
Public Issue or Public Offer refers to the process of issuing securities by a company to new
investors, thereby incorporating them into the company’s group of shareholders. Public
Offerings are broadly categorised into two main types: Initial Public Offer or IPO and
Further Public Offer FPO.

Initial Public Offer (IPO)

An Initial Public Offer, commonly known as an IPO, is a process in which a company that
hasn’t been listed on any stock exchange before issues new securities or presents its existing
securities for sale to the general public for the first time. The main objective of this process is
to help the company secure a listing on a stock exchange.

Further Public Offer (FPO)

A Further Public Offer, often referred to as an FPO or Follow-On Offer, is a unique form of
public offering. It takes place when a company already listed on a stock exchange chooses to
issue more securities or put existing ones up for sale to the public. The primary goal of an
FPO is to boost the company’s financial reserves and meet changing capital needs, all while
allowing current shareholders the chance to sell their holdings if they opt to do so.

Types of IPO
There are two common types of IPO. They are-

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1) Fixed Price Offering
Fixed Price IPO can be referred to as the issue price that some companies set for the initial
sale of their shares. The investors come to know about the price of the stocks that the
company decides to make public.
The demand for the stocks in the market can be known once the issue is closed. If the
investors partake in this IPO, they must ensure that they pay the full price of the shares when
making the application.
2) Book Building Offering
In the case of book building, the company initiating an IPO offers a 20% price band on the
stocks to the investors. Interested investors bid on the shares before the final price is decided.
Here, the investors need to specify the number of shares they intend to buy and the amount
they are willing to pay per share.
The lowest share price is referred to as the floor price, and the highest stock price is known as
the cap price. The ultimate decision regarding the price of the shares is determined by
investors’ bids.

Advantages of Public Offer or Going Public

Going public, through a public offer, offers several advantages to a company, including:
1. Expansion Opportunities:
Going public enables a company to access a significant source of funds, which can be used
for business expansion, product development, or entering new markets. This infusion of
capital provides the financial support necessary to execute strategic growth plans
effectively.
2. Capital Acquisition:
A public offering provides a streamlined and cost-effective method for raising capital. The
company can choose to get it from a wide range of investors, including institutional and retail
investors, for securing the funds needed for its operations as well as projects.
3. Liquidity for Stakeholders:
Going public offers an avenue for directors, employees, and pre-IPO investors to convert
their ownership stakes into tradable shares. This liquidity allows them to realise the value of
their investments, potentially attracting top talent and early-stage investors.
4. Access to Equity Market:
A publicly traded company gains continuous access to the equity market. This can be
advantageous for future capital needs, as the company can issue additional shares or
securities to raise funds, when necessary, without undergoing the complexities of private
financing.

Laws Governing SEBI Guidelines for IPO or Initial Public Offer in India
The Securities Exchange Board of India plays a pivotal role in regulating the Indian corporate
securities market. Established in 1988, SEBI has evolved to become the primary authority
overseeing market operations.
In addition to SEBI ICDR Regulations, other laws governing SEBI guidelines for
IPO include:

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1. Securities Contract (Regulation) Act, 1957: This Act provides the overarching legal
framework for the securities market in India.
2. Securities Contract (Regulation) Rules, 1957: These rules offer specific guidelines and
procedures for conducting transactions within the securities market.
3. Companies Act, 2013: The Companies Act of 2013 contains provisions pertaining to the
issuance of securities by companies, including those related to public offerings.

SEBI Guidelines for IPO?

SEBI guidelines for IPOs are bifurcated into two distinct processes, catering to unlisted and
listed companies. These guidelines dictate the various requirements, disclosures, and
compliance measures that companies must adhere to when planning and executing an IPO.
They encompass aspects such as the issuance of prospectuses, pricing of securities,
disclosures to investors, and the role of intermediaries, among others.

SEBI Guidelines for IPO for Unlisted Companies

Unlisted companies in India have several options to conduct their initial public offerings in
adherence to SEBI guidelines. These options are defined by specific routes, each with its own
set of requirements. The SEBI guidelines for IPO for unlisted companies are:

Profitability Route – Entry Norm 1

The Profitability Route, governed by SEBI guidelines for IPO, entails certain criteria that
companies must meet to go public. These criteria encompass financial parameters and
performance benchmarks over a designated period:
1. The issuer must have a minimum net worth exceeding INR 1 Crore in each of the
previous three years.
2. The net tangible assets of the issuer must exceed INR 3 Crores each year, with no more
than 50% held in the form of monetary assets during the previous three years.
3. The average operating profit (before tax) of the company must surpass INR 15 Crores in
at least three out of the last five years.
4. The issue size must not exceed five times the pre-issue net worth.
5. If the company has undergone a name change, a minimum of 50% of the revenue in the
previous year must be generated from activities carried out under the new name.
To facilitate easier IPO processes for companies unable to meet the Profitability Route
requirements, SEBI has introduced two alternative routes, granting access to the primary
market for their public offerings.

QIB Route – Entry Norm II

For companies necessitating a substantial capital base but failing to meet Profitability Route
conditions, the QIB Route offers an alternative under the SEBI guidelines for IPO. This route
allows companies to access the public interest through the book-building procedure, with a
specific allocation to Qualified Institutional Buyers:
 75% of the company’s net offer to the public must be compulsorily allotted to
Qualified Institutional Buyers.
 Failure to achieve the minimum subscription of QIB renders the company liable to
refund the subscription fee.

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Appraisal Route – Entry Norm III
The Appraisal Route involves the appraisal and participation of the project or public offer by
Financial Institutions or Scheduled Commercial Banks, contributing a minimum of 15%,
with at least 10% from the appraisers:
 The minimum post-issue face value capital must be INR 10 crores or mandatory
market-making for at least two years.
 All three entry norms also stipulate a requirement of a minimum of 1000 prospective
allottees for the issuer company’s public issue.

SEBI Guidelines for Public Issue for Listed Companies

Listed companies in India seeking to conduct a FPO must adhere to specific guidelines
outlined by the SEBI. These guidelines pertain to criteria related to company name changes
and issue sizing:
1. Name Change Condition:
If the company has undergone a name change within the past year, a minimum of 50% of the
company’s revenue for the previous year must be generated from activities conducted under
its new name.
2. Issue Size Restriction:
The size of the FPO must not exceed five times the pre-issue net worth, as per the company’s
audited balance sheet from the last financial year.

Exempted Entities under SEBI Guidelines for IPO

The Securities and Exchange Board of India has identified certain entities that are exempted
from the standard entry norms applicable to public issues. The exempted entities under SEBI
guidelines for IPOs are:
1. Private and Public Sector Banks
Private and public sector banks are exempted from the entry norms outlined for making a
public issue.
2. Infrastructure Companies with Appraised Projects
Infrastructure companies that have had their projects appraised by a Public Financial
Institution like IDFC or IL&FS, or a bank that was previously a PFI, and have received at
least 5% of their project cost in funding from any of these institutions are exempt from the
standard entry norms.
General SEBI Guidelines for IPO in India
Companies planning to make a public offer in India must adhere to the following general
SEBI guidelines for IPO in India:
1. No Association with Similar Role: Directors, promoters, or other Key Management
Personnel of the company must not hold similar positions in any other company.
2. No Debarment from Primary Market: Those with control over the company, such as
directors, promoters, or key management personnel, must not be debarred from accessing the
primary market.

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3. Listing Application: The company must submit an application to list its shares with a
recognised stock exchange in India.
4. Depository Arrangement: The company must enter into legal contracts with a depository
to dematerialise its specific securities.
5. Fully Paid-up Equity Shares: Partly paid-up equity shares must be fully paid-up before
the IPO.
6. Minimum Public Shareholding: A listed company must maintain a minimum public
shareholding of 25%. If not met, the company has one year to comply with this requirement.
7. Source of Funds: The company must arrange its financial resources from trustworthy and
verifiable sources, excluding the amount allocated to issue new company shares.
8. Draft Offer and Red Herring Prospectus: For IPOs exceeding INR 50 lakhs, the
process begins with the company filing a draft offer in the form of a Draft Red Herring
Prospectus (DRHP) with SEBI.
9. Final Offer Document: After the review and receipt of the final observation letter from
SEBI, the company must file the final offer document or Red Herring Prospectus with the
Registrar of Companies (ROC).
10. Book Building Process: Companies may opt for the book-building process under Entry
Norm II, and in such cases, the IPO process must be completed within one year from the date
of receiving the final observation letter from SEBI.
11. Independent Board Members: At least 50% of the company’s Board of Directors must
consist of independent investors.
12. No Obligations to Promoters: The same 50% of the Board of Directors must have no
obligations to the promoters or the company.
13. No Involvement in Economic Offences: Directors or promoters of the company must
not be guilty of any economic offences.
14. Not a Wilful Defaulter: The company, its promoters, or directors must not be classified
as wilful defaulters.
15. Disclosure of Shares to SEBI: The issuer company must disclose the number of shares
or the number of shares to SEBI between the date of filing its draft Red Herring Prospectus
and the issuance of specified securities.
16. Large IPO Pre-submission: If a company plans to go for a public issue exceeding INR
100 crores, it must submit a draft offer document with the regional office of SEBI before
proceeding with the IPO.

IPO Process Steps:

Step 1: Hiring Of An Underwriter Or Investment Bank
To start the initial public offering process, the company will take the help of financial
experts, like investment banks. The underwriters assure the company about the capital being
raised and act as intermediaries between the company and its investors. The experts will also
study the crucial financial parameters of the company and sign an underwriting agreement.
The underwriting agreement will usually have the following components:

 Details of the deal

 Amount to be raised

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  Details of securities being issued

Step 2: Registration For IPO

This IPO step involves the preparation of a registration statement along with the draft
prospectus, also known as Red Herring Prospectus (RHP). Submission of RHP is mandatory,
as per the Companies Act. This document comprises all the compulsory disclosures as per the
SEBI and Companies Act. Here’s a look at the key components of RHP:

 Definitions: It contains the definitions of the industry-specific terms.

 Risk Factors: This section discloses the possibilities that could impact a company’s
finances.
 Use of Proceeds: This section discloses how the money raised from investors will be
used.
 Industry Description: This section details the working of the company in the overall
industry segment. For instance, if the company belongs to the IT segment, the section
will provide forecasts and predictions about the segment.
 Business Description: This section will detail the core business activities of the
company.
 Management: This section provides information about key management personnel.
 Financial Description: This section comprises financial statements along with the
auditor's report.
 Legal and Other Information: This section details the litigation against the
company along with miscellaneous information.
This document has to be submitted to the registrar of companies, three days before the offer
opens to the public for bidding. Alongside, the submitted registration statement has to be
compliant with the SEC rules. Post-submission, the company can make an application for an
IPO to SEBI.

Step 3: Verification by SEBI

Market regulator, SEBI then verifies the disclosure of facts by the company. If the application
is approved, the company can announce a date for its IPO.

Step 4: Making An Application To The Stock Exchange

The company now has to make an application to the stock exchange for floating its initial
issue.

Step 5: Creating a Buzz By Roadshows

Before an IPO opens to the public, the company endeavors to create a buzz in the market by
roadshows. Over a period of two weeks, the executives and staff of the company will
advertise the impending IPO across the country. This is basically a marketing and advertising
tactic to attract potential investors. The key highlights of the company are shared with various
people, including business analysts and fund managers. The executives adopt various user-
friendly measures, like Question and Answer sessions, multimedia presentations, group
meetings, online virtual roadshows, and so on.

Step 6: Pricing of IPO

The company can now initiate pricing of IPO either through Fixed Price IPO or by Book
Binding Offering. In the case of Fixed Price Offering, the price of the company’s stocks is
announced in advance. In the event of Book Binding Offering, a price range of 20% is
announced, following which investors can place their bids within the price bracket. For the

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bidding process, the investors have to place their bids as per the company’s quoted Lot price,
which is the minimum number of shares to be purchased. Alongside, the company also
provides for IPO Floor Price, which is the minimum bid price and IPO Cap Price, which is
the highest bidding price. The booking is typically open from three to five working days and
investors can avail the opportunity of revising their bids within the stipulated time. After
completion of the bidding process, the company will determine the Cut-Off price, which is
the final price at which the issue will be sold.

Step 7: Allotment of Shares

Once the IPO price is finalised, the company along with the underwriters will determine the
number of shares to be allotted to each investor. In the case of over-subscription, partial
allotments will be made. The IPO stocks are usually allotted to the bidders within 10 working
days of the last bidding date.

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

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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

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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.

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  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 Trading of already issued securities takes
market. After issuance, such securities are listed place in a secondary market.
in stock exchanges for subsequent trading.
Investors purchase shares directly from the Investors enter into transactions among
issuer in the primary market. themselves to purchase or sell securities.
Issuers are thus not involved in such trading.
The stock issue price in a primary market Prices of the traded securities in a secondary
remains fixed. market vary according to the demand and
supply of the same.
Sale of securities in a primary market generates Transactions made in this market generate
fund for the issuer. income for the investors.
Issue of security occurs only once and for the Here, securities are traded multiple times.
first time only.
Primary markets lack geographical presence; it A secondary market, on the contrary, has an
cannot be attributed to any organisational set-up organisational presence in the form of stock
as such. exchanges.
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.

Instruments in Secondary Market

Here are the vital secondary market instruments:

 Fixed Income Instrument: Instruments form part of investments that guarantee fixed
income in the form of regular payments. Example: Debentures and bonds

1. Corporate Bond: These are tradable debt securities issued by corporations, such as
Apple or Amazon.
2. Government Bond: These are tradable debt securities issued by governments, such as
US Treasuries.

 Variable Income Instrument: Investments made in these instruments do not

guarantee a fixed, regular income. Instead, the returns vary based on the market
fluctuations. Example: equity and derivatives.

1. Futures: These are contracts that obligate buyers and sellers to buy or sell assets at a
predetermined price and time in the future.
2. Options: These are contracts that give buyers the right but not the obligation to buy or
sell assets at a predetermined price and time in the future.

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  Hybrid Instrument: Instruments offer both fixed and variable returns on
investments. For example, a convertible debenture.
Aftermarkets Participants of Secondary Market

 Investors: These are individuals or institutions that buy and sell securities in
secondary markets for investment purposes.
 Brokers: These participants in secondary markets are intermediaries that facilitate
trades between buyers and sellers in secondary markets, charging fees or commissions
for their services.
 Market Makers: These are intermediaries that provide liquidity to aftermath markets
by buying and selling securities on their own account.
 Regulators: These are government agencies that oversee and regulate secondary
markets to ensure they operate fairly and efficiently.
Features of Secondary Market

The secondary market is pivotal for stock market liquidity, empowering traders to transact
freely. Investors benefit by easily selling and buying securities within market hours.

 Liquidity: Enables seamless buying and selling in the stock market.

 Price Discovery: Determines a security’s fair market value through supply and
demand dynamics.
 Transparency: Prominent in stock exchanges, ensuring all participants access price
information.
 Accessibility: Online brokerages, such as Alice Blue, facilitate easy entry for retail
investors.
 Market Orders: Provides flexibility with various order types, like limit and stop
orders, enhancing trading strategies.

Benefits of Secondary Market

Here are some of the advantage of secondary markets:

 Liquidity: Secondary capital markets enable investors to quickly buy or sell

securities, enhancing the liquidity of financial assets.
 Price Discovery: Secondary markets facilitate the determination of market prices for
securities, reflecting the supply and demand of the assets.
 Risk Reduction: Secondary markets enable investors to diversify their portfolios and
hedge against risks, reducing the overall risk of their investments.
 Capital Formation: Secondary markets enable companies to raise capital by issuing
securities to investors, funding their growth and expansion.
Risks and Challenges of Aftermarkets

Here are some of the disadvantages of secondary markets:

 Market Volatility: Secondary markets can be volatile, leading to fluctuations in the

prices of securities.
 Insider Trading: Insider trading involves the use of non-public information to gain
an unfair advantage in the market.
 Market Manipulation: Market manipulation involves the deliberate attempt to
artificially influence the price of securities.

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  Systemic Risk: Systemic risk refers to the risk of a widespread financial system
collapse due to the failure of a major institution or event.
Examples of Secondary Market Transactions

Various example of secondary market transactions include:

 Stock Trading: Investors acquire shares of publicly traded companies like Apple or
Amazon from other investors on the New York Stock Exchange (NYSE) or in other
examples of stock markets. These shares, initially issued in an IPO, are now actively
traded on the secondary market.
 Bond Trading: Investors purchase corporate bonds, such as those from Microsoft or
Coca-Cola, from other investors in the bond market. These bonds, initially issued to
raise capital, are actively traded in the aftermath market.
 Mutual Fund Investment: Investors buy shares of mutual funds like Fidelity or
Vanguard from other investors in the secondary market. These funds, diversified
across securities like stocks and bonds, are actively traded in the aftermath market.
 Options Trading: Investors acquire call options on stocks like Tesla or Facebook
from other investors in the options market. These call options provide the right,
though not the obligation, to buy the underlying stock at a specified price within a set
timeframe.
 Futures Contract Trading: Investors purchase futures contracts on commodities like
crude oil or gold from others in the futures market. These contracts obligate investors
to buy or sell the underlying commodities at a predetermined price on a specified
future date.

Broker
A broker is an individual or firm that acts as an intermediary between an investor and a
securities exchange. Because securities exchanges only accept orders from individuals or
firms who are members of that exchange, individual traders and investors need the services
of exchange members.

Different Types of Share Market Brokers

There are several types of brokers in stock market who facilitate buying and selling of
securities. Here are the main types of brokers:
1. Full-Service Brokers: These brokers offer a wide range of services, including
research, advisory, portfolio management, and personalised assistance. They typically
charge higher brokerage fees compared to other types of brokers due to the additional
services they provide.
2. Discount Brokers: Discount brokers offer trading services at a lower cost, often with
a fixed brokerage fee or a very low percentage of the trade value. They provide a no-
frills trading platform without the extensive research and advisory services offered by
full-service brokers.
3. Online Brokers: These brokers provide online trading platforms that allow investors
to place orders, track their investments, and manage their portfolios electronically.

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 Both full-service and discount brokers can fall under this category, but many discount
brokers are specifically known for their online trading platforms.
4. Traditional Brokers: Traditional brokers operate through physical offices and offer
in-person assistance for trading and investment-related activities. While this model is
becoming less common with the rise of online trading, some investors still prefer this
personal touch.
5. Bank-Based Brokers: Some large banks in India have their own brokerage arms.
They offer trading services along with banking facilities, making it convenient for
customers to manage their finances and investments in one place.
6. Commodity Brokers: These brokers specialize in facilitating the trading of
commodities such as gold, silver, agricultural products, and other raw materials in the
commodity markets.
7. Currency Brokers: Currency brokers focus on facilitating trading in foreign
exchange (forex) markets, allowing investors to trade different currency pairs.
8. Institutional Brokers: These brokers cater primarily to institutional investors such as
mutual funds, insurance companies, and pension funds. They handle large volumes of
trades and often provide customized solutions for their institutional clients.
9. Retail Brokers: Retail brokers primarily serve individual retail investors. They offer
services designed for small-scale investors who trade in relatively smaller quantities
compared to institutional investors.
10. Sub-Brokers: Sub-brokers are individuals or entities authorised by stockbrokers to
provide trading services to clients. They operate under the umbrella of a main broker
and earn a commission for the trades they execute.

Direct Market Access (DMA) Brokers: These brokers offer direct market access to clients,
allowing them to place orders directly on the stock exchange’s trading platform. This can be
beneficial for high-frequency traders and institutional investors who require faster execution
and more control over their trades.

Discount Broker vs Full Service Broker

Discount Broker vs Full Service Broker
Aspect Discount Brokers Full-Service Brokers

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 Services Basic trading platform Extensive services and
research
Brokerage Fees Low fixed fees or commissions Higher brokerage fees
Research & Advice Limited to none Comprehensive research &
advice
Personalized Support Limited Dedicated customer
assistance
Trading Experience Self-directed Assisted trading and
guidance
Investment Guidance Limited Professional investment
advice
Portfolio Management Usually not offered Portfolio management
services
Target Audience Active traders and investors Investors seeking guidance
Additional Services Primarily online services In-person and online
services
Exploring Other Broker Types
Outside the stock market, brokers operate in various industries. In real estate, brokers
represent property sellers, determining values, listing properties, and advising on offers.

The Role of Brokers in the Stock Market

A stockbroker, often referred to simply as a broker, acts as an intermediary between investors
and the securities market. Their primary responsibility involves executing buy and sell orders
on behalf of clients. Investors rely on their expertise to make informed decisions in the stock
market, benefiting from their deep understanding of market dynamics and trends.
Let’s take a quick look at the role of brokers in the stock market:
 Buying and Selling: Brokers are like helpers who assist people in buying and selling
stocks (shares) of companies in the stock market.
 Middlemen: They act as middlemen between investors and the stock market. They
connect buyers and sellers to make trading possible.
 Access to Stock Exchange: Brokers have special access to the stock exchange, which
is like the marketplace for stocks. They can place orders to buy or sell stocks on
behalf of investors.
 Order Placement: When you want to buy or sell stocks, you tell your broker what
you want to do. They then place the order for you in the stock exchange.
 Executing Orders: Brokers ensure that your orders are placed correctly and at the
right price. They make sure the transactions happen smoothly.
 Trading Platforms: Brokers provide online platforms where investors can log in to
see their investments, place orders, and track their portfolio.
 Different Types: There are full-service brokers who offer a lot of help and advice,
and discount brokers who focus more on the actual trading process.
 Fees: Brokers charge fees for their services. It’s important to understand the fees they
charge before you start trading.
 Demat Account: Brokers help you open a “Demat” account, which holds your stocks
electronically. It’s like a digital wallet for your shares.
 Safety and Regulations: Brokers work under regulations to ensure fair and safe
trading in the stock market.

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 Convenience: Brokers make it convenient for regular people to invest in stocks
without needing to understand all the technical details of the stock market

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