MODULE 3

PRIMARY MARKET AND SECONDARY MARKET

3.1 PRIMARY MARKET

The primary market refers to the financial market where new securities, such as
stocks or bonds, are issued and sold for the first time. In this market, companies
raise capital by offering their securities to the public or to institutional investors.
Investors purchase these securities directly from the issuing entity, and the proceeds
from these sales go to the issuing company. It contrasts with the secondary market,
where existing securities are bought and sold among investors without the
involvement of the issuing company.

3.2 Features of primary market

1. Initial Offerings: The primary market is where new securities are initially offered to
the public. This includes initial public offerings (IPOs) for stocks or new bond
issuances.

2. Capital Formation: Companies raise capital by selling their securities to investors.

This capital can be used for various purposes such as expansion, research and
development, or debt repayment.

3. Direct Transactions: Investors in the primary market buy securities directly from
the issuing entity, such as a company or government. This direct transaction
distinguishes the primary market from the secondary market.

4. Issuer-Investor Relationship: The primary market establishes a direct relationship

between the issuer and the investor. Investors are buying directly from the company
issuing the securities.

5. Underwriting: In many cases, financial institutions known as underwriters play a

role in the primary market. They facilitate the issuance process by purchasing
securities from the issuer and then reselling them to investors.

6. Pricing Mechanism:The pricing of securities in the primary market is often

determined through mechanisms such as auctions or negotiations between the
issuer and underwriters. The initial offering price is crucial for attracting investors.

7. Regulatory Compliance: Companies issuing securities in the primary market need

to adhere to regulatory requirements and disclose relevant information to potential
investors. This ensures transparency and protects investors.
8. Limited Liquidity: Securities in the primary market are not as readily tradable as
those in the secondary market. Investors often need to hold onto their investments
until a secondary market develops for those securities.

9. New Financial Instruments:The primary market is where innovative financial

instruments and securities are introduced, contributing to the evolution of financial
markets.

10. Corporate Governance: The process of going public in the primary market often
involves companies adhering to higher standards of corporate governance, as they
need to comply with regulations and meet the expectations of public investors.

3.3 Players of primary market

In the primary market, there are key players involved in the process of issuing and
buying new securities. Here are the main players:

1. Issuer: This is the company or government that wants to raise capital by issuing
new securities. The issuer could be a company selling stocks or bonds, or a
government issuing bonds.

2. Underwriter: Underwriters are financial institutions or investment banks that help

the issuer bring their securities to the market. They often purchase the securities
from the issuer and then sell them to investors.

3. Investors:These are the individuals or institutions that buy the newly issued
securities directly from the issuer or through underwriters. Investors can include
regular people, mutual funds, pension funds, or other financial entities.

4. Regulatory Bodies: Government agencies or regulatory bodies play a crucial role

in overseeing and regulating the primary market. They set rules and ensure that
issuers provide accurate information to investors.

5. Securities and Exchange Commission (SEC):In the United States, the SEC is a
key regulatory body overseeing the primary market. It aims to protect investors and
maintain fair and efficient markets.

6. Stock Exchanges: In the case of stocks, once they are issued in the primary
market, they can be traded on stock exchanges in the secondary market. Exchanges
like the New York Stock Exchange (NYSE) or NASDAQ facilitate the trading of these
securities.
These players work together to facilitate the issuance of new securities, ensure
compliance with regulations, and provide opportunities for investors to participate in
the primary market.

3.4 Instruments in primary market

In the primary market, various financial instruments are issued by companies or
governments to raise capital. Here are common instruments in the primary market:

1. Stocks (Equities):Companies issue shares of stock, representing ownership in the

company. Investors buying these become shareholders, sharing in the company's
profits and losses.

2. Bonds:Bonds are debt securities issued by companies or governments to raise

capital. Investors who buy bonds are essentially lending money to the issuer in
exchange for periodic interest payments and the return of the principal amount at
maturity.

3. Initial Public Offerings (IPOs):When a private company decides to go public, it

conducts an IPO, issuing its shares to the public for the first time. Investors can buy
these shares directly from the company.

4. Preferred Stocks: These are stocks with characteristics of both equity and debt.
Preferred stockholders receive dividends before common stockholders and have a
higher claim on assets in case of liquidation.

5. Debentures:Similar to bonds, debentures are unsecured debt instruments that

companies issue. They don't have specific assets pledged as collateral, relying on
the issuer's general creditworthiness.

6. Treasury Securities:Governments issue treasury bills, notes, and bonds to raise

funds. These are considered very low-risk investments, with treasury bills having
short maturities, notes medium-term, and bonds longer-term.

7. Commercial Papers:Short-term debt instruments issued by corporations to meet

immediate funding needs. They typically have maturities ranging from a few days to
a year.

8. Rights Issues: Companies may issue rights to existing shareholders, allowing

them to buy additional shares at a discounted price. This is a way for companies to
raise additional capital from their current investors.

9. Convertible Securities: These are instruments (usually bonds or preferred stocks)

that can be converted into common stock at a later date. This gives investors the
option to convert their debt or preferred equity into common shares.
These instruments provide various options for companies and governments to raise
capital, and investors can choose based on their risk tolerance, investment goals,
and market conditions.

3.5 Merits of primary market

1. Capital Infusion:The primary market facilitates the raising of capital for companies
and governments by allowing them to issue and sell new securities, such as stocks
and bonds.

2. Business Expansion: Funds raised in the primary market can be used by

companies to expand their operations, invest in research and development, or
undertake new projects.

3. Investor Participation: Individual and institutional investors have the opportunity to

participate in the growth of companies by purchasing newly issued securities directly
from the issuer.

4. Price Discovery: The initial offering price in the primary market helps establish the
value of a security. This price discovery process is crucial for both issuers and
investors.

5. Corporate Governance Standards: Going public in the primary market often

necessitates adherence to higher corporate governance standards, promoting
transparency and accountability in company operations.

6. Innovation:The primary market is a breeding ground for financial innovation,

leading to the introduction of new financial instruments and investment opportunities.

7. Underwriting Support: The presence of underwriters provides expertise and

support to issuers, ensuring a smoother process for bringing securities to the market.

8. Public Visibility: Companies that enter the primary market through an IPO gain
increased visibility and exposure, potentially attracting more attention from
customers, partners, and other stakeholders.

9. Diversification for Investors: Investors can diversify their portfolios by gaining

access to a variety of securities with different risk-return profiles issued in the
primary market.

10. Economic Growth: A vibrant primary market contributes to overall economic

growth by providing companies with the necessary capital to expand, innovate, and
create employment opportunities.
These merits highlight the significance of the primary market in fostering economic
development, facilitating investment, and supporting the growth of businesses.

3.6 Demerits of primary market /Shortcomings of primary market

1. Price Volatility:The pricing of new securities in the primary market can be

influenced by various factors, leading to potential volatility and uncertainty for both
issuers and investors.

2. Market Timing Challenges: Companies may face challenges in determining the

optimal time to enter the primary market, as economic conditions and investor
sentiment can fluctuate.

3. High Costs: The process of issuing securities in the primary market involves
significant costs, including underwriting fees, legal expenses, and regulatory
compliance costs, which can be a burden for issuers.

4. Limited Liquidity Initially:Newly issued securities may lack liquidity initially, making
it challenging for investors to sell or trade them easily in the secondary market.

5. Market Manipulation Risks: There can be risks of market manipulation, where

certain entities may attempt to influence the price of securities during the initial
offering period.

6.Regulatory Compliance Burden:Companies entering the primary market must

comply with various regulations, which can be complex and time-consuming. This
regulatory burden may deter some companies from going public.

7. Unequal Access to Opportunities: Retail investors may have limited access to

certain primary market opportunities, which are often dominated by institutional
investors and high-net-worth individuals.

8. Overvaluation Risks: Due to hype or market trends, there is a risk that securities in
the primary market may be overvalued, leading to potential losses for investors when
market corrections occur.

9. Information Asymmetry:There may be information asymmetry between issuers

and investors, with issuers having more knowledge about the company than
individual investors, potentially affecting investment decisions.

10. Market Dependence:The success of an offering in the primary market is

dependent on the overall market conditions, and unfavorable conditions may impact
the pricing and demand for new securities.
These demerits highlight the challenges and risks associated with participating in the
primary market, emphasizing the need for careful consideration and due diligence by
both issuers and investors.

3.7 Methods of floating new issues

1.Public offering
*** Initial Public Offering (IPO):
- An IPO is the process by which a private company becomes public by offering its
shares to the public for the first time.
-The company works with investment banks to underwrite and sell its shares to the
public. The IPO involves extensive regulatory scrutiny and the drafting of a
prospectus that provides information about the company's finances, operations, and
risks.
- Companies use IPOs to raise capital for expansion, debt repayment, or other
business needs. It also allows early investors and employees to monetize their
stakes.
***Follow-on Public Offering (FPO):**
-An FPO occurs when a company, already publicly listed, issues additional shares
to the public.
- Similar to an IPO but without the same level of scrutiny. The company issues a
new prospectus, and existing shareholders may also participate.
- Companies use FPOs to raise more capital after their initial listing to fund further
expansion or meet other financial needs.

2. Rights Issue:
- A rights issue is an offering of additional shares to existing shareholders at a
discounted price compared to the market value.
- Shareholders receive rights that allow them to buy new shares in proportion to
their existing holdings. They can either exercise these rights or sell them to other
investors.
- Rights issues provide a way for companies to raise capital from their existing
investor base while maintaining the proportional ownership structure.

3. Private Placement:
- Private placement involves the sale of securities to a select group of institutional
investors or high-net-worth individuals, rather than the general public.
-Companies negotiate directly with investors, and the process is faster and
involves less regulatory scrutiny compared to an IPO.
- Private placements are often chosen for efficiency and confidentiality. They are
suitable for companies that do not want to go through the complexities of a public
offering.
4. Preferential Allotment
-In preferential allotment, companies issue securities to a specific group of
investors on a preferential basis, such as existing shareholders or strategic
investors.
- The company's board of directors decides the terms, and the allotment is based
on a predetermined formula.
- It allows companies to raise capital selectively, targeting specific investors who
may bring strategic value or have a vested interest in the company's success.

5. Book Building Process:

- In the book-building process, the offering price of securities is determined based
on investor demand.
- Investors submit bids indicating the quantity of shares they wish to buy and the
price they are willing to pay. The final price is often set at the highest price that
allows all available shares to be sold.
- This method aims to ensure that the offering price reflects market demand,
potentially maximizing the funds raised by the issuer.

6. Dutch Auction:
-In a Dutch auction, investors specify the quantity of shares they want and the
price they are willing to pay.
- The auction starts with a high price, and it gradually decreases until the demand
matches the available supply.
- Dutch auctions aim to find the optimal price that clears the market, ensuring that
all available shares are sold to investors willing to pay the highest price.

7. Employee Stock Option Plans (ESOPs):

- ESOPs involve the issuance of new shares to employees as part of a stock
option plan.
- Employees are granted options to buy shares at a predetermined price, providing
them with an opportunity to benefit from the company's success.
- ESOPs are used to attract and retain talent by aligning employees' interests with
the company's performance.

3.8 SECONDARY MARKET

The secondary market, also known as the aftermarket, is where existing securities
are bought and sold among investors after their initial issuance in the primary
market. In simple terms, it's the marketplace where individuals and institutions trade
previously issued financial instruments. The secondary market plays a crucial role in
providing liquidity to investors, allowing them to buy or sell securities without directly
involving the issuing company. Common examples of the secondary market include
stock exchanges (e.g., NYSE, NASDAQ) for stocks and over-the-counter (OTC)
markets for various financial instruments like bonds and derivatives.

3.9 Structure of secondary market

The structure of the secondary market involves various components that facilitate the
buying and selling of existing securities. Here's a brief overview:

1. Stock Exchanges:
- These are centralized platforms where securities, particularly stocks, are bought
and sold.
- Examples:New York Stock Exchange (NYSE), NASDAQ.
- Exchanges provide a transparent and organized marketplace with established
rules for trading securities.

2. Over-the-Counter (OTC) Market:

- A decentralized market where trading of financial instruments occurs directly
between parties without a central exchange.
- Examples:OTC markets for bonds, foreign exchange, and certain stocks.
- OTC markets offer flexibility but may have less transparency compared to stock
exchanges.

3. Brokers and Brokerage Firms:

- Intermediaries that execute buy and sell orders on behalf of investors.
- Role Brokers connect buyers and sellers, facilitating transactions. Brokerage
firms provide platforms for clients to access the secondary market.

4. Market Makers:
- Entities that quote both buy and sell prices for a security, providing liquidity to the
market.
- Market makers ensure that there are always buyers and sellers for a particular
security, contributing to market efficiency.

5. Clearing and Settlement Systems:

- Processes and entities that ensure the smooth and secure transfer of securities
and funds between buyers and sellers.
- Clearing houses and settlement systems reduce counterparty risk by ensuring
that securities and funds are exchanged accurately.

6. Depositories:
- Institutions that hold and manage securities in electronic form.
- Depositories maintain records of ownership, making it easier to transfer securities
without the need for physical certificates.

7. Regulatory Authorities
 - Government bodies overseeing financial markets and ensuring compliance with
regulations.
- Regulatory authorities set rules and regulations to maintain fair and transparent
markets, protect investors, and prevent fraudulent activities.

8. Investors
- Individuals, institutions, and entities participating in the buying and selling of
securities.
- Investors contribute to market dynamics by expressing their views through trading
activities, and they may include retail investors, institutional investors, and market
makers.

9. Electronic Trading Platforms

- Digital platforms that facilitate the electronic trading of securities.
- These platforms provide convenient and efficient ways for investors to execute
trades and access market information.

Understanding the structure of the secondary market involves recognizing the

interconnected roles of these components, creating a dynamic environment where
securities are actively traded among investors.

3.10 Functions of secondary market

The secondary market serves several important functions in the financial system,
providing liquidity and efficiency to investors. Here are the key functions:

1. Price Discovery:
- The secondary market helps establish the fair market value of securities through
continuous buying and selling. Prices are determined by supply and demand
dynamics, reflecting investors' perceptions of the true worth of assets.

2. Liquidity Provision:
- Investors can easily buy or sell securities in the secondary market, providing
liquidity. This liquidity allows investors to convert their investments into cash
relatively quickly, enhancing the attractiveness of the securities.

3. Risk Management:
- Investors can manage their investment portfolios more effectively by adjusting
holdings in response to changing market conditions. The secondary market
facilitates the buying and selling of securities, enabling investors to mitigate risks and
optimize their portfolios.

4. Capital Formation for Issuers:

 - Companies can raise additional capital by issuing new securities in the secondary
market. This could involve issuing additional shares through a follow-on public
offering (FPO) or issuing new bonds.

5. Investor Protection:
- Regulatory oversight in the secondary market ensures fair and transparent
trading practices. Regulatory authorities enforce rules to protect investors from fraud,
manipulation, and unfair trading practices.

6. Efficient Allocation of Capital:

- Resources are efficiently allocated as capital flows to companies and entities with
the most promising prospects. Investors can reallocate their funds based on
changing market conditions and new investment opportunities.

7. Enhanced Market Efficiency:

- The secondary market contributes to overall market efficiency by reflecting
current information and investor sentiment. This efficiency supports the allocation of
resources and helps prevent the mispricing of securities.

8.Benchmark for Performance:

- Securities traded in the secondary market provide benchmarks for evaluating the
performance of individual investments, asset classes, and market indices. Investors
and fund managers use these benchmarks for performance comparisons.

9.Accessibility for Small Investors:

- The secondary market provides small investors with the opportunity to buy and
sell securities, allowing them to participate in the same markets as larger institutional
investors.

10.Price Stability:
- Active trading in the secondary market often leads to price stability. Market
participants, including market makers and arbitrageurs, contribute to narrowing price
spreads and maintaining orderly trading conditions.

Understanding these functions underscores the importance of the secondary market

in facilitating the smooth functioning of financial markets and supporting the broader
economy.

3.11 Players in stock market

1. Investors:
- *Individual Investors: Regular people buying and selling stocks for personal
investment.
 - *Institutional Investors: Large entities like mutual funds, pension funds, and
insurance companies managing money on behalf of many investors.

2. Stock Exchanges:
- *NYSE (New York Stock Exchange): One of the largest and oldest stock
exchanges globally.
- *NASDAQ: Another major stock exchange, known for technology and growth-
oriented stocks.

3. Brokers:
- *Full-Service Brokers:Offer a range of services, including investment advice and
research.
- *Discount Brokers:Provide a platform for executing trades at lower commission
fees.

4. Market Makers:
- Individuals or firms that facilitate trading by quoting both buy and sell prices for a
security. They enhance liquidity and help maintain orderly markets.

5. Clearinghouses:
- Entities that ensure the smooth settlement of trades by acting as intermediaries
between buyers and sellers, clearing transactions, and reducing counterparty risk.

6. Depositories:
- Institutions that hold and manage securities in electronic form, maintaining
ownership records and facilitating the transfer of shares.

7. Regulators:
- *SEC (Securities and Exchange Commission): In the United States, regulates
securities markets, protects investors, and ensures fair and efficient markets.
- *Financial Regulators:In other countries, various regulatory bodies oversee stock
markets to maintain transparency and integrity.

8. Stock Analysts:
- Professionals who analyze stocks and provide research reports to help investors
make informed decisions.

9. Financial Media:
- News outlets, websites, and television channels that provide financial news,
analysis, and commentary, influencing investor sentiment.

10. Arbitrageurs:
- Traders who seek to profit from price discrepancies between different markets or
related securities.
11. Corporate Issuers:
- Companies that issue stocks to raise capital. They become publicly traded
through IPOs or other methods and are responsible for providing information to
shareholders.

12. Specialists:
- On some exchanges, specialists are individuals or firms assigned to maintain
liquidity and order in specific stocks by managing buy and sell orders.

13. Investment Banks:

- Involved in underwriting IPOs, advising companies on mergers and acquisitions,
and providing other financial services to corporations.

3.12 Merits of the Stock Market

1. Capital Formation:
- The stock market provides companies with a platform to raise capital by issuing
stocks. This capital can be used for business expansion, innovation, and other
growth initiatives.

2. Investment Opportunities:
- Investors have the opportunity to invest in a diverse range of stocks, providing
them with a chance to participate in the success and growth of various companies.

3. Liquidity:
- Stocks traded on the market can be bought or sold relatively easily, providing
investors with liquidity. This ease of trading enhances flexibility and the ability to
convert investments into cash.

4. Ownership in Profitable Companies:

- Investors who buy stocks become partial owners of the companies. If the
companies are profitable, investors may receive dividends or see an increase in the
value of their shares.

5. Wealth Creation:
- The stock market has historically been a source of long-term wealth creation.
Over time, well-performing stocks have the potential to provide substantial returns to
investors.

6. Price Discovery:
- Stock prices are determined by market forces based on supply and demand. This
price discovery mechanism reflects the collective assessment of a company's value
by market participants.
7. Portfolio Diversification:
- Investors can diversify their portfolios by holding a mix of different stocks. This
helps spread risk and reduce the impact of poor performance by any single
investment.

8. Economic Indicators:
- Stock market performance is often considered a barometer of economic health.
Rising stock markets may indicate economic growth and investor confidence.

9.Corporate Governance Standards:

- Companies listed on stock exchanges are often subject to higher corporate
governance standards, promoting transparency and accountability in their
operations.

10.National Savings and Investments:

- The stock market provides a channel for individuals and institutions to invest
their savings, contributing to national savings and fostering economic development.

11.Innovation and Entrepreneurship:

- The availability of venture capital through the stock market encourages
innovation and supports entrepreneurial ventures by providing funding for startups.

12.Job Creation
- Companies that access capital through the stock market can use those funds to
expand their operations, leading to job creation and economic growth.

13.Global Connectivity:
- Stock markets offer a means for global investors to participate in the success of
companies around the world, fostering international investment and economic
collaboration.

These merits underscore the importance of the stock market in promoting economic
growth, providing investment opportunities, and contributing to the overall financial
well-being of individuals and companies.

3.13 Demerits of stock market

1. Market Volatility:
- Stock prices can be highly volatile, leading to fluctuations that may result from
various factors, including economic conditions, geopolitical events, and investor
sentiment.

2. Risk of Loss:
 - Investments in the stock market come with the inherent risk of losing money.
Stock values can decrease, and investors may experience financial losses.

3. Speculative Nature:
- The stock market can be influenced by speculation rather than fundamentals,
leading to short-term price movements that may not necessarily reflect the true value
of a company.

4. Information Asymmetry:
- Insiders and institutional investors may have access to information that is not
readily available to the general public, creating information asymmetry and
potentially impacting fair market participation.

5. Market Manipulation:
- There is a risk of market manipulation, where individuals or entities may engage
in activities to artificially influence stock prices for personal gain.

7. Liquidity Risks:
- While stocks are generally liquid, certain market conditions can result in reduced
liquidity, making it challenging for investors to buy or sell securities at desired prices.

8. Overvalued Markets:
- Periods of exuberance or speculation can lead to overvalued markets, where
stock prices may not align with underlying fundamentals. This increases the risk of
market corrections.

9. Short-Term Focus:
- Investors and companies may be pressured to focus on short-term performance,
potentially neglecting long-term sustainability and growth.

10. Regulatory Compliance Costs:

- Companies listed on stock exchanges incur significant costs to comply with
regulatory requirements, including financial reporting, disclosure, and governance
standards.

11. Impact on Companies:

- The pressure to meet quarterly earnings expectations may lead to short-term
decision-making by companies, potentially at the expense of long-term strategic
planning.

12. Margin Trading Risks:

- Margin trading, where investors borrow money to invest, can magnify both gains
and losses, increasing the risk of significant financial setbacks.
13. Psychological Stress:
- Market fluctuations and the risk of financial loss can lead to psychological stress
for investors, affecting decision-making and well-being.

14. Market Dependence:

- Economic conditions and external factors heavily influence the stock market,
making it vulnerable to broader economic downturns.

15. Unequal Access to Opportunities:

- Retail investors may have limited access to certain investment opportunities, and
sophisticated financial instruments, which are often favored by institutional investors.

Understanding these demerits is crucial for investors to make informed decisions

and navigate the complexities of the stock market.

3.14 STOCK EXCHANGE

A stock exchange is a centralized and regulated marketplace where financial
instruments, primarily stocks and other securities, are bought and sold. It serves as a
platform for companies to list their shares and raise capital from the public, and for
investors to buy or sell these securities. Stock exchanges play a crucial role in the
functioning of financial markets, providing a transparent and organized venue for
trading, ensuring fair practices, and contributing to the overall liquidity and efficiency
of the market.

3.15 BSE ( Bombay Stock Exchange)

BSE stands for Bombay Stock Exchange. It is one of the major stock exchanges in
India, located in Mumbai. Established in 1875, the BSE is one of the oldest stock
exchanges in Asia. It plays a crucial role in the Indian financial market by providing a
platform for the trading of various financial instruments, including stocks, bonds, and
derivatives.
The Bombay Stock Exchange (BSE) serves several important functions within the
Indian financial system. Here are key functions of BSE:

1. Listing of Securities:
- BSE provides a platform for companies to list their securities, primarily stocks.
Listing allows these securities to be traded on the exchange.

2. Trading of Securities:
- BSE facilitates the buying and selling of a variety of financial instruments,
including stocks, bonds, and derivatives, through its electronic trading platform.

3. Indices:
- BSE is home to several benchmark indices, with the BSE Sensex being the most
prominent. These indices serve as indicators of the overall market performance.
4. Capital Formation:
- Through Initial Public Offerings (IPOs), companies raise capital by issuing new
shares to the public. BSE plays a key role in facilitating this process.

5. Debt Market:
- BSE provides a platform for the trading of debt instruments, such as government
securities and corporate bonds, contributing to the development of the debt market.

6. Derivatives Market:
- BSE hosts a derivatives segment where financial instruments like futures and
options are traded. This allows investors to hedge risk or engage in speculative
activities.

7. Investor Protection:
- BSE, regulated by the Securities and Exchange Board of India (SEBI),
implements measures to protect investors' interests and ensure fair and transparent
market practices.

8. Market Surveillance:
- BSE monitors market activities to detect and prevent market manipulation, fraud,
and other irregularities, contributing to the integrity of the financial markets.

9. Clearing and Settlement:

- BSE ensures the smooth clearing and settlement of trades, reducing counterparty
risk and ensuring that transactions are completed accurately.

10. Market Education:

- BSE plays a role in educating investors and market participants through various
initiatives, helping them understand market dynamics and investment strategies.

11. Technology Adoption:

- BSE has embraced modern technology for efficient trading and settlement
processes, contributing to the overall advancement of the Indian financial market
infrastructure.

12. Corporate Governance:

- Companies listed on BSE are required to adhere to corporate governance
standards, promoting transparency and accountability in their operations.

13. Secondary Market Liquidity:

- BSE enhances secondary market liquidity by providing a venue for continuous
trading, allowing investors to buy and sell securities easily.
14. Market Research and Data Dissemination:
- BSE provides market-related research and data, contributing to informed
decision-making by investors and market participants.

These functions collectively contribute to the BSE's role as a vital institution in India's
financial landscape, fostering capital formation, market efficiency, and investor
confidence.

3.16 NSE (National Stock Exchange)

NSE stands for the National Stock Exchange of India Limited. It is one of the leading
and largest stock exchanges in India, located in Mumbai. Established in 1992, the
NSE has played a pivotal role in transforming India's financial markets.

Key features and functions of the National Stock Exchange (NSE) include:

1. Equity and Derivatives Trading:

- NSE provides a platform for the trading of various financial instruments, including
equities (stocks) and derivative products such as futures and options.

2. Indices:
- NSE Nifty 50: A major stock market index that represents the performance of the
50 largest and most liquid stocks listed on the NSE.

3. Futures and Options Market:

- NSE is known for its active derivatives segment, where investors can engage in
hedging and speculation using futures and options contracts.

4. Listing of Securities:
- Companies can list their shares on the NSE through an initial public offering
(IPO), allowing them to raise capital from the public.

5. Debt Market:
- NSE operates a debt market segment where fixed-income securities, including
government bonds and corporate bonds, are traded.

6. Currency Derivatives:
- NSE facilitates the trading of currency derivatives, allowing investors to hedge
against currency risks or speculate on currency movements.

7. Retail Participation:
- NSE has contributed significantly to increasing retail investor participation in the
Indian stock market through user-friendly trading platforms.

8. Clearing and Settlement:

 - NSE ensures the smooth clearing and settlement of trades, reducing counterparty
risk and ensuring the integrity of transactions.

9. Technology and Automation:

- NSE has adopted advanced technology for trading and settlement processes,
including electronic trading systems, contributing to market efficiency.

10. Investor Education:

- NSE is actively involved in investor education initiatives, providing information
and resources to help investors make informed decisions.

11. Market Surveillance:

- NSE monitors market activities to detect and prevent market manipulation, fraud,
and other irregularities, contributing to a fair and transparent marketplace.

12. Corporate Governance:

- Companies listed on NSE are required to adhere to corporate governance
standards, promoting transparency and accountability.

13. Benchmark for Indian Markets:

- NSE indices, particularly the Nifty 50, serve as key benchmarks for the
performance of the Indian stock market.

14. Innovations:
- NSE has introduced innovative products and trading mechanisms, enhancing
market liquidity and accessibility.

15. Regulation:
- The NSE is regulated by the Securities and Exchange Board of India (SEBI),
ensuring compliance with regulatory standards and investor protection.

The NSE, along with the Bombay Stock Exchange (BSE), plays a crucial role in the
development and functioning of India's financial markets. It has contributed to the
growth and sophistication of the Indian capital market ecosystem.

3.17 OTCEI
OTCEI stands for Over-the-Counter Exchange of India. It was the first organized
stock exchange in India that operated on an over-the-counter (OTC) basis. OTCEI
was established in 1990 with the objective of providing a platform for small and
medium-sized companies to raise capital through the issuance of securities.

Key features and functions of OTCEI:

1. Primary Focus:
 - OTCEI primarily focused on facilitating the listing and trading of securities issued
by smaller companies, often referred to as "unlisted" companies.

2. Listing Criteria:
- The listing criteria on OTCEI were more lenient compared to the requirements of
the larger established stock exchanges, making it accessible for smaller companies
to raise funds.

3. Electronic Trading:
- OTCEI was an early adopter of electronic trading systems. It used computerized
systems for order matching and trade execution, contributing to operational
efficiency.

4. Market Makers:
- Similar to other exchanges, OTCEI had market makers who facilitated trading by
providing liquidity and quoting buy and sell prices for the listed securities.

5. Direct Market Access:

- OTCEI allowed investors to have direct market access, enabling them to place
orders and execute trades electronically.

6. Focus on Investor Protection:

- OTCEI implemented measures to protect the interests of investors, ensuring fair
and transparent trading practices.

7. Innovative Products:
- OTCEI introduced innovative financial products, such as the Cumulative
Convertible Preference Share (CCPS), to attract both issuers and investors.

8. Reduced Listing Costs:

- OTCEI aimed to reduce the listing costs for companies, making it more feasible
for smaller businesses to access the capital market.

While OTCEI was a pioneering effort in providing a platform for smaller companies, it
faced challenges over time. As the Indian capital market evolved, other exchanges,
including the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE),
also introduced measures to facilitate the listing of smaller companies. Eventually,
OTCEI's operations were merged with the Inter-Connected Stock Exchange of India
Limited (ISE), another exchange focused on regional connectivity.

3.18 Listing of Securities

The listing of securities refers to the process by which a company's stocks, bonds, or
other financial instruments become officially traded on a stock exchange. It involves
meeting specific requirements set by the exchange to ensure transparency, investor
protection, and fair market practices.

Here are the key steps involved in the listing of securities:

1. Selection of Stock Exchange:

- The company chooses a stock exchange where it wants its securities to be listed.
This decision is often based on factors such as the exchange's reputation, market
reach, and regulatory environment.

2. Compliance with Listing Requirements:

- The company must meet the listing requirements of the chosen stock exchange.
These requirements typically include financial criteria, corporate governance
standards, and minimum market capitalization. For example, the company may need
to have a certain level of profitability, a minimum number of shareholders, or
maintain specific accounting standards.

3. Submission of Application:
- The company submits an application to the stock exchange, providing details
about its financial health, business operations, and corporate governance practices.
This application is often accompanied by a prospectus that contains comprehensive
information for potential investors.

4. Due Diligence:
- The stock exchange and regulatory authorities conduct due diligence to verify the
information provided by the company. This process ensures that the company
complies with all listing requirements and provides accurate and complete
information.

5. Approval from Regulatory Authorities:

- The listing application, along with the prospectus, is submitted to regulatory
authorities for approval. In many cases, this includes securities market regulators
such as the Securities and Exchange Commission (SEC) in the United States or the
Securities and Exchange Board of India (SEBI) in India.

6. Allotment of Securities:
- If the company is conducting an initial public offering (IPO), securities are allotted
to investors. This involves determining the allocation of shares to institutional
investors, retail investors, and other categories.

7. Listing on the Exchange:

- After receiving regulatory approval, the securities are officially listed on the stock
exchange. They become available for trading, and investors can buy and sell them
on the open market.
8. Ongoing Compliance:
- Listed companies must adhere to ongoing disclosure and reporting requirements.
This includes regularly publishing financial statements, providing updates on material
events, and complying with corporate governance standards.

9. Market Making (Optional):

- Some companies may engage market makers to facilitate liquidity in their
securities. Market makers quote buy and sell prices, helping to maintain an active
market for the company's shares.

Listing on a stock exchange provides visibility, access to a broader investor base,

and a liquid market for a company's securities. It is a significant step in the
company's lifecycle, often associated with increased capital, enhanced credibility,
and opportunities for growth.

3.19 Trading and Settlement procedure in stock market

The trading and settlement procedures in the stock market involve a series of steps
to ensure the orderly and efficient execution of trades and the subsequent transfer of
ownership. Here's a general overview of the process:

1. Order Placement:
- Investors place buy or sell orders through brokerage firms. These orders can be
market orders (executed at the current market price) or limit orders (executed at a
specific price).

2. Order Matching:
- Stock exchanges match buy and sell orders based on price and time priority. The
order book displays the best available bid and ask prices.

3. Trade Execution:
- When a buy order matches a sell order at a specific price, a trade is executed.
The stock exchange facilitates the transaction, and the trade details are recorded.

4. Trade Confirmation:
- Brokers send trade confirmations to clients, providing details of the executed
trades, including the stock, quantity, price, and the total transaction value.

5. Continuous Trading:
- Continuous trading occurs throughout the trading session, allowing investors to
place orders and execute trades as market conditions change.
### Settlement Procedure:

1. Trade Date (T-Day):

- The date on which the trade is executed is known as the trade date (T-day).

2. T+2 Settlement Cycle:

- In many markets, including the U.S. and India, there is a T+2 settlement cycle,
meaning that the actual transfer of securities and funds occurs two business days
after the trade date.

3. Clearing:
- After trade execution, the clearinghouse becomes involved. It acts as an
intermediary, ensuring the integrity of the trade and managing the risk associated
with each transaction.

4. Confirmation to Clearing house:

- Brokers submit details of executed trades to the clearinghouse for confirmation.
The clearinghouse validates the trades and determines the net obligations of each
broker.

5. Securities Transfer:
- On the settlement date (T+2), ownership of securities is transferred from the
seller's demat account to the buyer's demat account.

6. Funds Settlement:
- Simultaneously, the funds are transferred from the buyer's account to the seller's
account through the clearinghouse. This is often facilitated by a central depository or
a clearing corporation.

7. Final Confirmation:
- Once the securities and funds settlement is complete, final confirmations are sent
to the involved parties, indicating the successful closure of the trade.

8. Record Keeping:
- The stock exchange, clearinghouse, and depository maintain records of the
trades and settlements. These records help in auditing, regulatory compliance, and
resolving disputes.

9. Role of Depositories:
- Central depositories play a crucial role in the settlement process by maintaining
electronic records of securities and facilitating the transfer of ownership.
10. Continuous Monitoring:
- Throughout the settlement process, there is continuous monitoring by regulatory
authorities to ensure compliance with rules and regulations.

By following these procedures, the stock market ensures a transparent, efficient, and
secure environment for the trading and settlement of securities. The specific details
may vary slightly based on the rules and regulations of different stock exchanges
and regulatory bodies.