Chapter 11

Secondary Market
Prepared by
Mohammad Mahbubul Alam
Assistant professor, finance & banking
Department of business administration
Dhaka commerce College
Introduction
The market for long term securities like bonds, equity stocks and preferred stocks
is divided into primary market and secondary market. The primary market deals
with the new issues of securities. Outstanding securities are traded in the
secondary market, which is commonly known as stock market predominantly deal
in the equity shares. Debt instruments like bonds and debentures are also traded
in the stock market. Well regulated and active stock market promotes capital
formation. Growth of the primary market depends on the secondary market. The
health of the economy is reflected by the growth of the stock market.
Secondary Market
A secondary market is a marketplace where already issued securities – both shares
and debt – can be bought and sold by the investors. So, it is a market where
investors buy securities from other investors, and not from the issuing company.

When a company issues its securities for the first time, it does it in the primary
market. After the IPO (Initial Public Offering), those securities get available for
trade in the secondary market. Stock markets such as DSE , CSE, the New York
Stock Exchange (NYSE) and the NASDAQ are examples of the secondary
markets.
FEATURES OF SECONDARY MARKET
• Gives liquidity to all investors. Any seller in need of cash can easily sell the security due to the presence
of a large number of buyers.

• Very little time lag between any new news or information on the company and the stock price reflecting
that news. The secondary market quickly adjusts the price to any new development in the security.

• Lower transaction costs due to the high volume of transactions.

• Demand and supply economics in the market assist in price discovery.

• An alternative to saving.

• Secondary markets face heavy regulations from the government as they are a vital source of capital
formation and liquidity for the companies and the investors. High regulations ensure the safety of the
investor’s money.
Types of secondary market
Once the securities have been issued in the primary market, they become available for

purchase and sale in the secondary markets. There are secondary markets for all kinds of

securities, such as stocks, bonds, futures, options, etc.

In the primary market, the investors purchased securities directly from the issuers. However,

in the secondary market, the investors purchase these securities from other investors.

There are primarily two types of secondary markets:

Exchanges

Over-the-counter (OTC) markets

Exchanges

A stock exchange is a place where stockbrokers and trades trade stocks and

other securities.

Usually each country will have at least one national stock exchange. For

example, in the USA, the two major stock exchanges are: the American Stock

Exchange (AMEX) and the New York Stock Exchange (NYSE). Apart from that

there are several regional exchanges which deal in small local companies.
When you normally trade in stocks or futures, you are actually trading them through a stock exchange, such as AMEX, or

NYSE. These exchanges have the following characteristics:

a) An exchange provide a centralized place where all trades are conducted

b) An exchange plays the key role of acting as the counterparty to all trades. This means is that when you are buying 100

shares of IBM, you are not directly buying it from another party selling those shares. Instead, you are buying it from

the stock exchange.

c) An exchange removes counterparty risk, because it stands on the other side of all trades.

d) Since all the all trades flow through one central place, the price quoted for a security is always the same regardless of

who is making the trade. This, in theory, provides a level playing field for all types of investors.

e) Exchanges offer greater regulatory oversight, since only members can trade on the exchange, and also only listed

products can be traded on an exchange.

Over-The-Counter Market Definition

An OTC market is a market where two parties directly trade financial

instruments like stocks, commodities, and currencies without any
supervision. Small companies often use OTC markets to trade because
they are unable to make it to the exchange listings. OTC trading does
not need a physical location like at the London Stock Exchange or the
Euronext. Instead, traders communicate through telephone calls,
emails, and other electronic systems of trade.
• Over-the-Counter (OTC) means the facilities provided by an exchange for the purpose of

buying or selling of unlisted or delisted securities from the stock exchanges. The OTC Market

provides an alternative to stock exchange listing for securities of issuers that either choose

not to be listed on Dhaka Stock Exchange or not to meet the relevant listing requirements.

The term OTC Securities is a catch all phrases for any security that is not listed on stock

exchange.

• Dhaka Stock Exchange Ltd. provides Over-The-Counter (OTC) facilities for transaction of share

of companies as per SECs directive no. SEC/CMRRCD/2001-16 dated 06 September, 2009

transaction procedure of which is followed by Securities and Exchange Commission (Over-the-

Counter) Rules, 2001

• An OTC market is a decentralized market where non-listed securities are traded by the
market participants. There is no centralized place to make the trade. Instead, the market
consists of all the participants trading among themselves. Examples of OTC markets are spot
forex and many debt markets. This also happens for stocks, and deals are done directly
between broker/dealers who make two-way prices to each other in the stocks that they are
trading in.

• In the US, an example of OTC market is The National Association of Securities Dealers
Automated Quotation (NASDAQ). On NASDAQ, the brokers/dealers display their quotes via
an electronic system. However, they must directly contact the dealer to get a firm quote
and execute the deal.
In an OTC market, the traders agree on the prices of securities or other products amongst

themselves. The prices for the securities may not be the same across all the customers in the

market because it is not a formal market.

Two participants in the OTC market are capable of trading without the awareness of other

market traders. Generally, OTC market trades are subject to fewer regulations because they are

less transparent than normal exchanges.

Stock exchanges simplify liquidity of assets and mitigate risks in case one party defaults. It also

provides transparency over the prices of securities in the market. However, this is contrary to

over-the-counter markets as they don’t offer transparency on the prices of securities to the

public.
Generally, OTC markets provide a wider platform for investors as they
do not have to limit themselves to investing in the companies the
exchanges list for them. Investors also get a chance to invest in the
small, ignored companies that have a possibility for growth.
An OTC market has the following characteristics:

a) Since there is no centralized exchange and little regulation, there is heavy competition
between different providers for gaining higher trading volume to their firm.

b) OTC markets generally have lower transaction costs compared to exchanges

c) In OTC markets, the prices for the securities vary from trade to trade and from firm to
firm. Even the quality of execution varies from firm to firm. This means that the deals
are not always done at the best price.

d) OTC markets are prone to counterparty risk because there is no centralized exchange
and the parties are directly dealing with each other.
Broker vs Dealer
Brokers and dealers are terms associated with securities. Though both have almost the same work,

they are different in many aspects. The main difference between a broker and a dealer is in respect

of their role in the market, as well as the capital required. A broker is a person who executes the

trade on behalf of others, whereas a dealer is a person who trades business on their own behalf.

Broker: is an individual or party (brokerage firm) that arranges transactions between a buyer and

seller for a commission when the deal is executed.

Dealer : is a firm or person that purchases securities and hold hem for later sale at a profit. Dealer

buy and sell securities at his own account

1. A broker is a person who executes the trade on behalf of others, whereas a dealer is a person
who trades business on their own behalf.

2. A dealer is a person who will buy and sell securities on their account. On the other hand, a
broker is one who will buy and sell securities for their clients.

3. While dealers have all the rights and freedom regarding the buying and selling of securities,
brokers seldom have this freedom and these rights.

4. A broker has only a little experience in the field compared to dealers. It has also been seen
that brokers become dealers once they get experience.

5. A broker is normally paid a commission for transacting the business. A dealer is not paid a
commission, and he or she is a primary principal.
Types of broker
Commission broker: theses brokers buy and sell securities for a commission. They
are registered members of the stock exchange. The broker sells and purchase
securities in his own name and he is not allowed to deal with non members.

Jobber: a Jobber is a professional speculators who works for a profit. Jobber only
re sell the stock they have to brokers but not to the general public.

Floor broker: the floor broker buys and sells shares for other brokers on the stock
exchange. He too receives commission on the order that he executes, which is a
part of the brokerage charges paid by the customer to the commission broker.
Types of brokerage account
Cash account: brokerage account that can only make cash transaction

Margin account: brokerage account in which the brokerage firms

extends borrowing privilege .

Wrap account: account that shifts investment decisions to a

professional money manager and charge a flat annual fee.
What is an order in the share market?

In the share market, order refers to an instruction given by the issuer of the
order to their broker or dealer for buying, selling, delivering or receiving
securities/commodities as part of their commitment to a given set of terms.

1) Market order

A market order is an order to buy or sell a stock at the best available price.
Generally, this type of order will be executed immediately. However, the
price at which a market order will be executed is not guaranteed.
2. Limit order

In contrast, a limit order is an order that places a limit on the price you are willing to pay to buy a stock or on the

price you are willing to accept to sell a stock. Thus, a limit order guarantees a price, but execution remains uncertain.

This is because the stock may not reach the price at which the order is placed during the trading day.

3. Stop Loss order

A stop-loss order is designed to limit an investor’s loss on a position in a security. For example, if an investor holds

100 shares of ABC Company at Rs. 20 per share and the stock is now trading at Rs. 28 per share. The investor wants

to continue holding the stock for further upsides but also does not want to lose out on all the unrealized gains he has

made so far. He decides to hold the stock, but sell it only if it drops below Rs. 25. Rather than monitoring the stock

price on a daily basis, the investor can simply enter a stop-loss order to sell 100 shares of ABC if its price drops to

Rs. 25. This way he can gain if the stock goes up and limit his losses if the stock goes down
History of stock market in Bangladesh
The journey of Bangladesh stock market started on April 28, 1954 as East Pakistan Stock Exchange
Association Ltd. At that time Bangladesh used to be ruled by Pakistan and the name of the country was
East Pakistan. But trading on this market started in 1956 with a total paid up capital of Taka 4 billion and
196 securities were listed on this market. The exchange was renamed on June 23, 1962 as East Pakistan
Stock Exchange Limited. Again renamed as Dacca Stock Exchange Limited in 13 May 1964. Trading on
Dhaka Stock Exchange was suspended from 1971 to 1976 because of liberation war and its post-
independence weak economy. Then the trading was resumed in 1976 with 9 listed securities having a total
paid up capital of Taka 137.52 million. (Hassan, Islam & Basher, 2000)

By 1987, the number of listed companies in DSE increased up to 92. but high development of the market
is noticeable in the 1990s. Comparing with any other time since its establishment. ( economy watch,2010)
Function of DSE
The major functions are: 1) Market Surveillance.
1) Listing of Companies (As per Listing Regulations).
2) Publication of Monthly Review.
2) Providing the screen based automated trading of
3) Monitoring the activities of listed companies (As per
listed Securities.
Listing Regulations).
3) Settlement of trading (As per Settlement of
4) Investors grievance Cell (Disposal of complaint bye
Transaction Regulations).
laws 1997).
4) Gifting of share / granting approval to the
5) Investors Protection Fund (As per investor
transaction/transfer of share outside the trading
protection fund Regulations 1999).
system of the exchange (As per Listing Regulations
6) Announcement of Price sensitive or other
47).
information about listed companies through online.
5) Market Administration & Control.