Secondary Market in India

You must have invested in shares through an IPO, hoping to make some quick money. An initial public offer popularly called IPO is an excellent way of making money in the primary market. Now let’s take a look at the secondary market. Secondary market consists of both debt and equity and a lot of trading happens in the secondary market.

What is the difference between primary and secondary markets? In the primary market, investors buy shares directly from Companies issuing them. In the secondary market, investors trade shares already issued by Companies over stock exchanges like NSE and BSE.

What is secondary market? Why invest in secondary market? Let’s find out. Want to know more on investment planning? We at IndianMoney.com will make it easy for you. Just give us a missed call on 022 6181 6111 to explore our unique Free Advisory Service. IndianMoney.com is not a seller of any financial products. We only provide FREE financial advice/education to ensure that you are not misguided while buying any kind of financial products.

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Secondary Market In India

In the secondary market, previously issued stocks, bonds, options and futures are bought or sold. In the secondary market, prices of stocks depend on depend and supply. Companies try to influence stock prices in the secondary market, through various methods like buybacks.

Find this difficult to understand? I’ll explain. Let’s say you buy shares of TCS on the stock market. You deal only with another investor who sells the shares to you and not the Company itself.

Why secondary markets? Secondary markets help trade safely in shares as they are regulated by the capital markets regulator, SEBI. Secondary market is the market for outstanding securities and enables price discovery. The market value of shares gives value to the Company.

Secondary markets are defined as the markets where the securities which are initially issued by the companies are traded. The trading involves buying and selling of the securities. In India the process of trading can be dated back to the year 1875. The secondary market plays a very vital role as one of the indicators of the industrial development of a nation. Each and every country has the secondary markets some of the well known stock exchanges are Bombay Stock Exchange (BSE) of India, New York Stock Exchange (NYSE) of America, National Stock Exchange(NSE), London Stock Exchange of The Great Britain, NASDAQ etc.

The securities or the financial instruments are issued in the primary market and the investors purchase these instruments directly from the IPO or through the Private Placement. Investors who have purchased the securities or the financial instruments sell these in the secondary market to other investors. Various securities & financial instruments that are traded in the stock market are;

• Equity Shares
• Preference Shares
• Bonus Shares
• Bonds
• Debentures
• Commercial Papers
• Treasury Bills

Beginning of Trading in India

For the first time the process of trading started in India in the year 1875 in Bombay which was then called as “Native Share & Stock Broker’s Association” the total number of members were 318 and the amount of membership fees that they paid was Rs.1 Since then this association has been growing and now it is called as the BSE or the Bombay Stock Exchange which is known worldwide and is considered as a barometer to measure the industrial growth of the developing India.

See  Also: Features of Capital Market

Types of Secondary Market

• India International Exchange
• Ace derivatives and commodity exchange limited
• Ahmedabad stock exchange
• BSE Ltd
• Calcutta stock exchange
• Hapur commodity exchange Ltd
• India pepper and spice trade association, Kochi
• Indian commodity exchange Ltd, New Delhi
• Magadh stock exchange Ltd
• Metropolitan stock exchange of India Ltd
• Multi Commodity Exchange of India Ltd (MCX)
• National Commodity and Derivatives Exchange
• National Multi Commodity Exchange of India Limited, Ahmedabad
• National Stock Exchange of India Ltd. 
• Rajkot Commodity Exchange Ltd., Rajkot
• Spices and Oilseeds Exchange Ltd., Sangli
• Universal Commodity Exchange Ltd., Navi Mumbai

Functions of Secondary Market

• It’s a continuous market for securities

You can trade in shares without risk and enjoy continuous opportunities for trading.

• You can evaluate securities:

The prices of shares give a clear idea on the performance of Companies.

• You can mobilize savings:

Public savings are mobilized through mutual funds, REITs among others. Ordinary citizens get an opportunity to invest small amounts in mutual funds.

• Stock markets encourage healthy speculation:

Stock markets offer opportunities for healthy speculation and the chance to reap high profits in the markets.

• Easy movement of funds:

Stock exchanges like BSE and NSE help investors and Companies sell/buy shares.

• BSE and NSE protect investors:

SEBI regulates stock exchanges and protects the interests of investors.

• Secondary market offers liquidity:

Banks invest idle money in the secondary market and earn quick profits in a short time.

• Secondary markets are an economic barometer:

You get an idea on the economic conditions of the Nation based on the stock markets.

• Secondary market regulates Companies:

Stock markets force Companies to follow rules and regulations. It regulates the management of Companies.

• Stock markets attract foreign capital:

The stock markets attract foreign capital into India. FIIs and FPIs jump into Indian stock markets as they offer high returns. The stock markets help strengthen the currency of the Nation.

SEE ALSO: Government Securities Market

Secondary Market Instruments:

• Equity:

Equity offers ownership in a business. When you invest in the equity of a Company, you are part-owner of the business.

• Equity Shares:

These are ordinary shares and represent fractional ownership of a Company. If you hold equity shares, you enjoy voting rights in the Company.

• Right Issues:

It is the new issue of shares to existing shareholders in the ratio already held.

• Bonus Shares:

You get additional shares at no additional cost, based on shares already held.

• Preference Shares:

If you own preference shares, you are entitled to a fixed dividend. You get paid first, before dividends are paid to ordinary equity shareholders.

• Security Receipts:

Security receipt is issued by an ARC (asset reconstruction Company) or a securitization Company, to a qualified institutional investor, giving him a right/interest/title in the issued financial asset in securitization.

• Government Securities:

Government Securities also called G-Secs, enjoy a Sovereign Guarantee. G-Secs are issued by the RBI on behalf of the Government. G-Secs offer fixed coupon/interest rates and are paid half-yearly. Maturities range from 1 year up to 20 years.

• Debentures:

Debentures are bonds issued by Companies bearing a fixed rate of interest and payable half-yearly on specific dates.  Principal is repaid on maturity. Debentures are secured against assets of the Company in favor of debenture holders.

• Bonds:

Companies, Government agencies and Municipal bodies issue bonds. An investor in bonds lends money to the issuer (Company) and the issuer promises to repay the money on a fixed date called maturity date.

Features of the Secondary Market:

Buyback of shares:

A buyback allows a Company to invest in its own shares. When a Company buys its own shares, it reduces the number of outstanding shares in the market. This increases prices of shares of the Company.

Take a look at some of the prominent buybacks:

• TCS had gone for a Rs 16,000 Crore buyback.
• L&T had gone for Rs 9,000 Crore buyback at Rs 1500 a share.
• Kaveri Seeds had opted for Rs 200 Crore buyback.
• HCL Technologies had opted for Rs 4,000 Crore buyback.

Why Does a Company Opt for a Buyback?

• It helps increase the promoter holdings
• Increases EPS (Earnings per share)
• It writes off capital not represented by assets rationalizing capital structure. (Debt: Asset ratio is capital structure).
• To increase share prices.
• If there’s surplus cash not required by the business. In the past, Coal India and Infosys have sat on a huge cash pile.

Corporate Action:

Any action initiated by a Company which has a direct impact on shareholders. This could be declaration of dividend, bonus shares or even a stock split.

What is a Stock Split?

In a stock split the number of shares of the Company increase, but the price comes down. This is because market capitalization remains the same.

Take a look at the SBI stock split in 2014:

The SBI board had fixed November 21^st 2014 as the record date for the stock split in the ratio 1:10. The shares of face value Rs 10, split into shares of Rs 1 each, in a 1:10 stock split. The stock prices split from Rs 2,913 a share to close the day at Rs 297 a share.

Advantages of Secondary Market

• It mobilizes savings:

It encourages investors to invest money in the form of shares. Secondary markets provide a platform for easy trading in shares, which helps convert shares to cash.

• Great investment opportunities for shareholders:

Shareholders enjoy a great opportunity to save and invest. There is capital appreciation as share value increases, also an opportunity to get dividends on shares.

• You get investment advice:

There are stockbrokers and investment advisers who offer investment advice in secondary markets. They advice on how to buy/sell shares and you don’t need to be an expert on stocks.

• Better Corporate Governance:

While managers are custodians of the Company, shareholders are the owners. The manager is accountable to the shareholders of the Company. Management of listed Companies is always better than the unlisted, as shareholders keep a close eye on the management of the Company.

Disadvantages of Secondary Market

• Secondary markets are volatile:

Investments in stocks are risky. Shares go up and down many times a day. You could earn high returns or lose a lot of money.

• Brokerage and Commissions:

When you buy/sell shares, brokers earn commissions, eating up profits.

• Time consuming:

The process of investing in secondary markets may be time consuming.

Stock Exchanges in India

There are other stock exchanges present in India apart from BSE & NSE some of them are;

• Bangalore Stock Exchange
• Cochin Stock Exchange
• Hyderabad Stock Exchange
• Delhi Stock Exchange
• Pune Stock Exchange
• Madras Stock Exchange
• Bhubaneshwar Stock Exchange

The trading is carried out in the secondary market and there are various people & procedures followed to carry out the trading. A pre-requisite for a company’s securities to be traded in the secondary market is that the company should be listed in the stock exchange.

What is Listing in Stock Exchange?

Listing is the process of registering a company in the stock exchange. It has been made compulsory by the SEBI (Securities & Exchange Board of India) that a company which is intending to offer shares/securities through the prospectus must be listed in the stock exchange. A company can be listed in one or more stock exchanges but once the company is listed it has to follow all the rules and regulations that have been laid down by the stock exchange. The company has to provide all the information that the stock exchange asks for during the procedure of listing. The company concerned must apply in a prescribed form along with the various documents that are required by the authorities of the stock exchange for example;

• Certified copies of Memorandum & Articles of Association
• Underwriting Agreements
• Particulars of the shares & debentures which are to be issued and their specimen copies
• Copies of balance sheets & audited accounts of the last 5 years
• Particulars of the dividends and interest paid in the previous years, regarding the capital structure & brief history of the company, etc

The above are just some of the documents apart from these there are other documents and criteria and obligations which are to be met by the company. The authorities scrutinize the documents and if they are satisfied then call upon the company to sign the listing agreement and this listing agreement contains all the rules and regulations that the company must follow failing which the stock exchange may cancel the listing or suspend the trading of shares & securities of that particular company.

Advantages of Listing

• The investors have faith is the company is listed.
• When the company is listed its name is always in the news as and when there is discussion about the stock market hence it gains free publicity or it gets marketed.
• If the company is listed then it becomes easy for it to borrow from financial institutions.
• On the basis of the value of its securities in the market it can lure many investors.
• The listing of a company becomes an advantage for the existing investors as the company has to follow the rules and regulations which have been framed to protect the interest of the investors.

Disadvantages of Listing

• The true picture of the performance company cannot be decided lonely on the basis of the value of the securities in the stock market.
• In the process of getting listed in stock market the company is forced to disclose the information which can be easily accessed by the competitors.

In the secondary market even an individual person can trade but for an individual to trade in the market either he must be a broker or else the individual must hire a broker. In the stock exchanges only the brokers are allowed to enter and to do the trading.

Who is Broker?

Broker is a person who trades in the stock exchange. A broker can represent his clients or himself. A broker is ears & eyes of the individual investor because it is the broker who knows in & out of the market and has the right knowledge of the trading. A broker can always suggest his clients to invest in the right company as he has a fair idea of the way in which the market is behaving. There are various brokerages in India some of them are Indiabulls, Sharekhan, India Infoline etc. Brokers are part of the secondary market and are registered to the stock market. Anyone can become a broker if he can pass through the written test and get through the interview conducted by SEBI. There are certain criteria or obligations that he must fulfill to become a broker like he should be a citizen of India, he should not be declared as bankrupt, he should not be having any criminal records, he must have completed 12th class etc.

Types of Broker

There are various kinds of brokers in the market. Following are the variousekinds of brokers and their assistants:

Commission Brokers

These are the first kind and are the one who generally represent their clients. These brokers have large number of clients from whom they receive the orders and accordingly execute the orders through the jobbers. The brokers charge commission for every transaction they do on behalf of their clients.

Jobbers

A jobber is an independent & professional broker. The jobbers keep a close watch on the market and make a forecast about the worth of the securities. A jobber purchases the securities and sell them at a higher price hence the main motive of this kind of brokers is to earn profits. Usually when a broker has to either sell or purchase the securities they approach the jobbers and the jobbers give a two-way price or it is called as double-barelled price. The lower limit is the price at which he is going to purchase the securities and the higher indicates the selling price. The margins whatever the jobbers gain is called as the “jobber’s turn”.

Authorized Clerks

These are the assistants of the stock broker. A broker cannot be always present on the trading floor (it’s a place or the floor where the actual trading takes place) so he appoints clerks who represent him and carry out the trading on his behalf. According to the rules a stock broker can appoint only limited number of clerks and he will be solely responsible for every transaction or the trading that is done by the clerk.

Sub-Broker

He acts as an agent for a broker. The sub-broker is not a part of the stock exchange but he is subject to all the rules & regulations that are applicable for the member brokers. The sub-broker gets the clients to the broker. Based on the business that he has brought fot the broker he is paid commission. The sub-brokers are called as “the Remisiers” in BSE

Trading Process of Stock Exchange

Following are the different steps involved in the Trading process

Step 1: First step is that the investors who are interested in investing in the stock market choose a broker or a brokerage firm who can represent them in the stock market.

 Step 2: The clients place the order with their broker. In this world of technology the orders are usually placed over the phone calls. The clients call up their brokers and tell him to purchase or sell the shares based on their interest or some of the clients ask the suggestion from the broker and if convinced go ahead with that.

Step 3: The broker based on the orders of the clients approaches the jobbers and fixes the price.

Step 4: Once the transaction has been the details are taken down in a small rough book.

Step 5: Once the transaction has taken place the broker /authorized clerk prepares a contract note it is a written agreement which contains all the details regarding the selling/buying of the shares and the brokerage that is charged. This agreement is sent to the client also.

Step 6: Finally the shares are delivered to the client along with the transfer deed which is duly signed by the transferor as it has been a rule to have a Demat account so, now the shares are directly transferred to the account and there is no need of signing the transfer deed.

Dematerialization

Dematerialization is nothing but the physical form of share certificates are converted to the electronic form and are stored with the depository participant. A depository holds all the securities of its clients in the electronic format and it facilitates easy transfer of the ownership of the certificates when the trading is done. A depository participant is an intermediary and it must be registered with SEBI to offer the depository related services.

See Also: How to Dematerialize Physical Shares?

Process of Dematerialization

The process is as follows;

• An individual investor who owns the shares approaches a depository participant for opening a demat account.
• After completing filling up of all the required forms he submits the forms along with the shares in the physical form to depository participant.
• The depository participant will send the application forms along with the shares to the registrar and will also intimate NSDL.
• The registrar checks the application form and the authenticity of the shares and then sends the confirmation the Demat account has been created.

Advantages of Dematerialization

With the introduction of this technology of dematerialization of the shares it has paved way for easy trading. Some of the advantages are;

• Filling up of transfer deeds is not necessary
• No need of carrying the share certificates
• No scope for forgery and theft.
• Easy transfer of ownership
• Fast payment on selling the shares

It has been made compulsory by SEBI that all the investors who are interested in trading must and should have the demat account.

SEBI Act

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