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SECONDARY CAPITAL
MARKET
PRESENTED BY:
ASHWIN SAINI
GROUP 2 JITIN GARG
SECTION B VIKAS KHATKAR
YASHIKA GUPTA
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CONTENTS

 Financial Markets and its Types

 Secondary Market
 Difference between Primary and Secondary Market
 Features of Secondary Market
 Stock Exchange of India
 Products of Secondary Market
 Advantages and Disadvantages of Secondary Market
 Type of Orders
 Market Participants
 Clearing and Settlement
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FINANCIAL MARKETS

A financial market brings buyers

and sellers together to trade in
financial assets such as stocks,
bonds, commodities, derivatives
and currencies.
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FINANCIAL MARKETS

 Money markets are used by government and corporate entities to borrow and
lend in the short term.
 Capital markets are used for long-term assets, which are those with maturities of
greater than one year.
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PRIMARY MARKETS

 Primary markets are where

investors are able to purchase
securities directly from the issuer.
 The primary market is where
securities are created.
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SECONDARY MARKETS

 Secondary markets are defined as the markets where the securities, which are
initially issued by the companies, are traded.
 The secondary market assist the operations associated with the primary
market.
 It is also referred to as the stock market.
 Prices of stocks depend on demand and supply.
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DIFFERENCE BETWEEN PRIMARY MARKET
AND SECONDARY MARKET

BASIS OF COMPARISON PRIMARY MARKET SECONDARY MARKET

Type of Purchasing • Direct • Indirect

• Supplies funds to issuer • It Does not provide funding

Financing company for expansion or to issuer.
diversification.
Number of times security • Only once • Multiple times
can be sold
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BASIS OF COMPARISON PRIMARY MARKET SECONDARY MARKET

Who will gain the amount • Company • Investor

on the sale of share?

Price • Fixed price • Fluctuates depending on

Demand and Supply

Organizational Difference • Not rooted in any specific • It has a physical Existence

spot or geographic location
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FEATURES OF SECONDARY MARKET

 Exchange
 Over the counter
 Capital gain
 It creates Liquidity.
 Aids in financing the industry.
 Secondary market does not directly contribute to capital formation.
 Secondary markets are an economic barometer
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OVER THE COUNTER (OTC)

 Process in which stocks of typically smaller companies, that cannot meet

exchange listing requirements of formal exchanges are traded. However, many
other types of securities also trade here.
 Stocks that trade on exchanges are called listed stocks whereas stocks that
trade via OTC are called unlisted stocks.
 Securities that are traded over-the-counter are traded via a dealer network as
opposed to on a centralized exchange.
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OVER THE COUNTER (OTC)
Pros
 OTC provides access to securities not available on standard exchanges such as bonds,
ADRs, and derivatives.
 Fewer regulations on the OTC allows the entry of many companies who can not, or
choose not to, list on other exchanges.
 Through the trade of low-cost, speculative investors can earn significant returns.
Cons
 OTC stocks have less trade liquidity due to low volume which leads to delays in
finalizing the trade and wide bid-ask spreads.
 Less regulation leads to less available public information, the chance of outdated
information, and the possibility of fraud.
 OTC stocks are prone to make volatile moves on the release of market and economic
data.
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ABOUT STOCK MARKETS

 A Stock Market may be defined as a place where shares of public listed

companies are traded
 Once new securities have been sold in the primary market, they are traded in
the secondary market, where one investor buys shares from another investor
at the prevailing market price or at whatever price both the buyer and seller
agree upon.
 The secondary market or the stock exchanges are regulated by the Securities
and Exchange Board of India (SEBI).
 These stock exchange facilitate stock brokers to trade company stocks and
other securities. A stock may be bought or sold only if it is listed on an
exchange.
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HOW DOES THE STOCK MARKET WORK?

IPO

Shares

Shares
Capital

Investor Investor
Primary Funds
Company (Seller) (Buyer)
Market
Secondary
Market
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HOW AN ORDER IS PROCESSED

Exchange confirms to
the broker Broker debits/credits
to your account
Broker sends it to
Exchange finds counter
the exchange
party

Place Order
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STOCK EXCHANGES IN INDIA

 The Bombay Stock Exchange (BSE), located on Dalal Street, Mumbai, is the
largest stock exchange in India with 5262 listed companies and a market
capitalisation of ₹1,51,08,711 crores (approx. US$ 2.197 trillion) as of 24 July
2019.
 It was established in 1875 and is Asia’s oldest stock exchange.
 The S&P BSE Sensex (Sensitive Index) is a free float market weighted stock
market index of 30 well established and financially sound companies on the
market, representing various industrial sectors of the Indian economy.
 Another important stock exchange is the National Stock Exchange (NSE), which
was established in 1992.
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STOCK EXCHANGES IN INDIA

 It was the first demutualised electronic stock exchange in India.

 It has 1931 listed companies and a market capitalisation of ₹1,49,34,227 crores
(approx. US$ 2.172 trillion) as of 24 July 2019.
 The NIFTY 50 (National Stock Exchange Fifty) is a free float market capitalisation
weighted index that is the weighted average of 50 Indian company stocks from
thirteen different sectors of the Indian economy.
 Other stock exchanges in India include the Calcutta Stock Exchange, India
International Exchange (India INX), Metropolitan Stock Exchange of India and the
NSE IFSC.
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BOMBAY STOCK EXCHANGE

 The BSE transitioned from an open outcry floor trading exchange to fully
electronic trading system in 1995. The system implemented for this purpose is
called BOLT ( BSE On-Line Trading).
 On 31 November 2006, SEBI issued guidelines for investment in stock exchanges.
Under these guidelines, shareholdings of trading members were to brought
down to 49% by divestment or issuing of additional equity capital.
 10% stake was picked up by Deutsche Boerse and Singapore Exchange (SGX). The
remaining 41% was sold to large domestic and foreign investment firms and high
net worth individuals
 On May 19, 2007, the BSE completed the process of demutualization.
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BSE VS NSE

BSE (Bombay Stock Exchange) NSE (National Stock Exchange)

Year of Establishment 1875 1992

Total number of listed 5262 1931
entities
Market capitalisation (₹ 1,51,08,711 1,49,34,227
crore) as on 24 July 2019
Index S&P BSE Sensex NIFTY 50
Number of stocks used in 30 50
calculating index
Base index value 100 1000
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BSE VS NSE

BSE (Bombay Stock Exchange) NSE (National Stock Exchange)

Base Period 1978-79 1993-94

Date of launch of index 1 January 1986 1 April 1996
Most recent index value (30 37397.24 11085.40
July 2019 closing value)
P/E Ratio for 2018-19 28.0 29.0
Total Turnover in Equity cash 7,75,590 79,49,002
segment for 2018-19 (₹
crore)
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HOW IS THE INDEX CALCULATED?

 Suppose the Index consists of only 2 stocks: Stock A and Stock B.

 Suppose company A has 1,000 shares in total, of which 200 are held by the promoters,
so that only 800 shares are available for trading to the general public. These 800 shares
are the so-called 'free-floating' shares.
 Similarly, company B has 2,000 shares in total, of which 1,000 are held by the
promoters and the rest 1,000 are free-floating.
 Now suppose the current market price of stock A is Rs 120. Thus, the 'total' market
capitalisation of company A is Rs 120,000 (1,000 x 120), but its free-float market
capitalisation is Rs 96,000 (800 x 120).
 Similarly, suppose the current market price of stock B is Rs 200. The total market
capitalisation of company B will thus be Rs 400,000 (2,000 x 200), but its free-float
market cap is only Rs 200,000 (1,000 x 200).
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HOW IS THE INDEX CALCULATED?

 So as of today the market capitalisation of the index (i.e. stocks A and B) is Rs

520,000 (Rs 120,000 + Rs 400,000); while the free-float market capitalisation of the
index is Rs 296,000. (Rs 96,000 + Rs 200,000).
 The year 1978-79 is considered the base year of the index with a value set to 100.
What this means is that suppose at that time the combined free-float market
capitalisation of the stocks that comprised the index then was, say, 60000, then we
assume that an index market cap of 60,000 is equal to an index-value of 100.
 Thus the value of the index today is = 296,000 x 100/60,000 = 493.33
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DEMUTUALIZATION

 Demutualization is a process that changes a mutual or co-operative association

into a public company by converting the interests of the members into
shareholdings. These holdings can then be traded like the shares of a company.
 The idea is to change the structure of exchanges that were originally formed as
trusts. Demutualization allows such associations to conduct commercial
business to make a profit just like a normal corporate entity.
 It also allows the exchange to put in place a board of directors, to look after day-
to-day operations.
 The government has made the demutualization of stock exchanges mandatory,
by amending the Securities and Contract (Regulations) Act.
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CORPORATIZATION

 Corporatization is the act of reorganizing the structure of a government-owned

entity into a legal entity with the corporate structure found in publicly traded
companies.
 The main goal of corporatization is allowing the government to retain
ownership of the company but still enable it to run as efficiently as its private
counterparts because government departments sometimes are inefficient with
the level of bureaucracy involved.
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CORPORATIZATION

 Key Features of Corporatization

 Separate legal entity: the organization is a legal independent entity

 Managerial autonomy: Management has control over all inputs and issues
related to production of services
 Transparency and reporting: The utility is likely to become subject to
prevailing company law and accounting rules
 Assets and Liabilities - the corporatized utility will have transferred to it the
resources it needs to perform its functions and to be viable.
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PRODUCTS ON NSE WEBSITE
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SECONDARY MARKET

CASH/ SPOT MARKET DERIVATIVES

• Equity Shares
• Bearer Debenture
• Mutual Funds • Equity Derivatives
• Exchange Traded Funds • Commodity Derivatives
• Offer for Sale • Currency Derivatives
• Security Lending and Borrowing • Interest Rate Futures
Scheme
• Interest Rate Futures
• Sovereign Gold bond scheme
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CASH MARKET

 Cash market is also known as spot market.

 This is where financial instruments, such as currencies and securities, are
traded for immediate exchange of cash for the financial instrument.
 Exchanges and over-the-counter (OTC) markets may provide spot trading
and/or futures trading.
 While the official transfer of funds between the buyer and seller may take time,
such as T+2 in the stock market and in most currency transactions, both parties
agree to the trade right now.
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DERIVATIVES

 Derivatives are financial securities and are financial contracts that obtain value
from something else, known as underlying securities. Underlying securities
may be stocks, currency, commodities or bonds, etc.
 The derivative itself is a contract between two or more parties.
 Derivatives can trade over-the-counter (OTC) or on an exchange.
 Derivatives were originally used to ensure balanced exchange rates for goods
traded internationally.
 Example: European investor investing in US will have exchange rate risk.
 Types: Future Contracts and Options
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FUTURE CONTRACTS

 Contract price: Price at which the trade takes place.

 Contract maturity: Future date when contract will be finished.
 Long Position: buyer
 Short Position: Seller
 There are always two parties in this, the long position who pays the contact
price and short position who delivers the security for fixed position.
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FUTURE CONTRACTS

 Future contracts can be said as trade agreements that are negotiated directly
between two parties for a transaction that is scheduled to take place in the future.
 The two parties must agree that which bond, when and where and at what price is to
be bought and sold.
 They are traded through centralized markets called future exchanges.
 Conditions:
i. The settlement date is in future.
ii. The contract price which is forward price which is set for date when contract will
mature.
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OPTIONS

 An options contract is similar to a futures contract in that it is an agreement

between two parties to buy or sell an asset at a predetermined future date for a
specific price.
 But the difference is that, with an option, the buyer is not obliged to exercise
their agreement to buy or sell. They can do as they please.
 It is an opportunity only, not an obligation but futures are obligations.
 Types:
i. Call Option: right to buy underlying security
ii. Put Option: right to sell the same asset
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OPTIONS

 Two prices are there:

i. Striking or Exercise Price: Price the call buyer will pay to or put buyer will
receive from the option seller.
ii. Optimum Premium: The interest which the buyer must pay to seller at the Date
0 to acquire the contract
 Example: An investor owns 100 shares of a stock worth Rs.100 per share. He
believes the stock's value will rise in the future but concerned about potential
risks and decides to hedge their position with an option. The investor could buy
a put option that gives them the right to sell 100 shares of the underlying stock
for Rs.100 per share (striking price) till the expiration date.
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EQUITY SHARES

 Equity shares are also known as ordinary shares and represent the ownership of
a company.
 Equity shares are the main source of finance of a firm.
 They are entitled to residual income of the company, but they enjoy the right to
control the affairs of the business.
 They bear the highest risk.
 Types are:
(i) with voting rights
(ii) with differential rights as to dividend, voting, etc.
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EQUITY SHARES WITH VOTING RIGHTS

 This is the most common type of shares. Majority of shares traded on stock
exchanges are of this type.
 The owners of these equity shares are entitled to dividend and voting rights.
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EQUITY SHARES WITH DIFFERENTIAL RIGHTS

 Differential Voting Shares(DVR) is like an ordinary equity share, but it provides

differential voting and dividend rights to the shareholder.
 They offer lower voting rights compared to ordinary equity shares. So, useful for
companies who want to raise money without diluting effective control of
company.
 DVR shares are priced lower at issuance and offer higher dividends.
 To issue DVR shares the company has to have distributable profits and has not
defaulted in filing annual accounts and returns for at least three financial years.
 The issue of such shares cannot exceed 25 per cent of the total issued share
capital.
EXAMPLE: TATA MOTORS 39
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BEARER DEBENTURE

 Bearer debentures are also called as Unregistered Debentures.

 Bearer debentures are those which are payable to the bearer.
 Coupons for interest are attached to the document and interest is paid to the
holders as it falls due.
 The register of debenture holders does not have the names of the debenture
holder recorded.
 So, they are transferable by mere delivery.
 Registration of transfer is not necessary.
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ADVANTAGES OF SECONDARY MARKET

 Liquidity: Ensures liquidity for the investors as one can easily buy or sell the
securities.
 Mobilizes savings: provide a platform for easy trading in shares, encourages
investors to invest money in the form of shares and mobilize savings.
 Valuation: It helps in valuation of a company as economic forces of supply and
demand determine the prices
 Indicator Of A Country’s Economic Condition: A rise or drop in the stock market
suggests a boom or recession in an economy.
 Safety Of The Investor’s Money: Secondary markets face regulations from the
government as they are a vital source of capital and ensure the safety of the
investor’s money.
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DISADVANTAGES OF SECONDARY MARKET

 Volatile Investments: Investment in BSE is subjected to many risks since the

market is volatile. These price fluctuations are unpredictable most of the times
and the investor sometimes have to face severe loss due to such uncertainty.

 Brokerage Commissions Kill Profit Margin: Every time an investor buys or sells
his shares, he has to pay some amount as a brokerage commission to the broker,
which kills the profit margin.
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INVESTOR VS SPECULATOR

The purchase of an asset with the Speculation is an act of conducting

hope of getting returns is called a risky financial transaction, in the
Meaning investment. hope of substantial profit.

Fundamental factors, i.e. Technical charts and market

Basis for decision performance of the company. psychology.

Time horizon Longer term Short term

Risk involved Moderate risk High risk

Expected rate of return Modest rate of return High rate of return

Behaviour of participants Conservative and Cautious Daring and Aggressive

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TYPES OF ORDERS

 Market Order
 Limit Order
 Stop Loss Order
 Buy Stop Order
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TYPES OF ORDERS

 A market order is an order to buy or sell a security immediately. A market

order generally will execute at or near the current bid (for a sell order) or ask
(for a buy order) price.

 A limit order is an order to buy or sell a security at a specific price or better. A

buy limit order can only be executed at the limit price or lower, and a sell limit
order can only be executed at the limit price or higher
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TYPES OF ORDERS

 A stop order, also referred to as a stop-loss order is an order to buy or sell a stock
once the price of the stock reaches the specified price, known as the stop price.
When the stop price is reached, a stop order becomes a market order.

 A buy stop order is entered at a stop price above the current market price.
Investors generally use a buy stop order to limit a loss or protect a profit on a
stock that they have sold short. A sell stop order is entered at a stop price below
the current market price
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MARKET PARTICIPANTS

 STOCKBROKERS
• A stock broker is a corporate entity, registered as a trading member with the
stock exchange and holds a stock broking license. They operate under the
guidelines prescribed by SEBI.
 SUB-BROKERS
• A sub-broker is any person who is not a trading member of a stock exchange
but who acts on behalf of a trading member as an agent or otherwise for
assisting investors in dealing in securities through such trading members.
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MARKET PARTICIPANTS

 DEPOSITORY
• When you buy shares, these shares sit in your depository account, usually referred
as DEMAT account.
• The depositories hold your shares and facilitate the exchange of your securities.
• This is maintained by only two companies in India- CDSL and NSDL.
 CLEARING HOUSE
• The job of clearing house corporation is to ensure guaranteed settlement of your
transactions.
• NSCCL- NSE and ICCL- BSE.
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(BUY TRANSACTION)

• T- DAY
By the end of this day, broker will debit the security price and all other
applicable charges towards the purchase.
• T+1- DAY
The broker passes on the money he has debited from the trading account to
the exchange.
• T+2- DAY
The exchange gives the broker the credit of the shares brought and the broker
credits the DEMAT account with the same.
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EXAMPLE

 Mr. A buys 100 shares of XYZ stock. He believes the stock will go up over time.
 Ms. B believes the price will soon decrease. To implement her strategy, Ms. B
enters an order to sell short 100 shares XYZ. Her stock broker borrows the 100
shares from Mr. A to lend to Ms. B to sell in the market.
 When the short sale is executed, Mr. A account and positions remain unchanged,
but Ms. B account will show a short position (-100 shares XYZ).
 Ms. B buys the stock at a lower price and pockets the profit and if prices go down
she will suffer losses.
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REFERENCES

 SEBI Annual Report 2018-19

 www.bloomberg.com
 www.economictimes.indiatimes.com
 www.rbi.org.in
 www.investopedia.org
 Tata Motors Annual Report 2006
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