UNIT- 3

Primary Market & Secondary Market

Primary Market:
The primary market mainly deals with new securities that are issued in the stock market for
the first time. Thus, it is also known as the new issue market. The main function of the
primary market is to facilitate the transfer of the newly issued shared from the companies to
the public. The main investors in this type of market are financial institutions, banks, HNIs,
etc.

Features of Primary Market

(1) In the PM securities are for the first time .That is PM is concerned only new issues of
securities for this reason PM are popularly known as new issue market.
(2) Securities are issued by industrial and commercial co. directly to investors.
(3) It promotes capital formation directly.
(4) The funds raised in the primary capital market are utilised by the issuing co.’s for
investment on fixed capital that is assets .

Players in New Issue Market and their Functions

1.Managers to the issue/Lead managers.
Lead Managers are appointed by the company to regulate the initial public issue. The main
duties-
(a) Drafting of prospects.
(b) Preparing the budgets for estimate the expenses.
(c) Suggesting the appropriate timings of the public issue.
(d) Provide assistance in marketing.
(e) Living advice to fix of registers, underwriters, brokers, bankers, and the advertising agents
etc.
(f) Directing the various agencies involved in the public issue.
2.Registrar to the issue. After the appointment of the lead managers to the issue the registrar
is appointed for the purpose of
(a) Receive share application from various collection centres.
(b) Basic of allotment of shares.
(c) Consultation with regional stock exchange for approval.
(d) Share certificate dispatching.
3.Underwriters.
Underwriters act as a middleman in between the company & the public. The unsubscribed
capital is collected by the company from the underwriters once the UW is purchased some
share for guaranteed purpose, he will become the shareholders.
4.Advertising Agent.
Advertising plays a key role in promoting the public issue. It takes the responsibility of
giving publicity to the issue on the suitable media.
5.Bankers
The role of bankers in connection with issue is very important. They collect application
money along with application forms. They charge commission in consideration of the
services performed for the issuing company. If the issue is large, more than one banker may
be appointed. The banker should have branches in those collection centres specified by the
central government.
Bankers may be coordinating bankers or collecting bankers. Collecting bankers collect
subscription, while coordinating bankers coordinate the collection work. They also monitor
the issue and report to the registrars.
6.Financial Institutions
In India, financial institutions also underwrite the issue. They also extend term loans to the
issuing company. The lead manager a sends copy of the prospectus and the proposed
programme for public issue to the financial institutions. On the strength of these documents,
the financial institutions agree to underwrite and give financial help.
7. Government and Statutory Agencies
The following are some important government and statutory agencies related to the new issue
in the primary market.
1. Securities Exchange Board of India (SEBI)
2. Registrar of Companies.
3. Reserve Bank of India in case of issue involving foreign investments.
4. Stock Exchange on which the issue is to be listed.
5. Industrial licensing authorities; and,
6. Pollution Control authorities, whose clearance is obtained for the project, is to be stated in
the prospectus.

Merits of primary markets:

1. Mobilization of Saving: Primary market helps in mobilising surplus savings of individuals
and others to investment.
2. Channelizing Savings for Productive Use: The funds raised in the primary market are
mainly used for expansion, diversification and modernisation purposes of the corporate.
 3. Source of Large Supply of Funds: The new issue market is a market for raising long term
capital funds from investors who are spread across the country. Thus, large amount of funds
can be raised for a longer period.
4. Rapid Industrial Growth: Investment of the surplus saving by the corporate in industrial
sector led to increase in production and productivity in the economy.

Demerits of primary markets

1. Possibility of Deceiving Investors: The corporate raising money through public issue may
not disclose detailed information in the prospectus, in order to deceive investors.
2. No Fixed Norms for Project Appraisal: The projects for which money is raised are to be
evaluated in terms of financial, economic, profitability and market feasibility by the project
manager. As there are no fixed norms for the appraisal of a project, the evaluation is subject
to the personal capability and judgement of the project.
3. Ineffective Role of Merchant Bankers: The merchant bankers perform most of the pre-
issue and post issue obligations with regarded to the new issue

Methods of floatation of securities in primary market

Primary Market (or) New Issues Market Primary Market (PM) is the market in which
funds are raised by industrial and commercial enterprises from investors through issue of
shares, debentures, and bonds.
Features of Primary Market
PM is concerned with long term funds or capital.
(5) In the PM securities are for the first time .That is PM is concerned only new issues of
securities for this reason PM are popularly known as new issue market.
(6) Securities are issued by industrial and commercial co. directly to investors.
(7) It promotes capital formation directly.
(8) The funds raised in the primary capital market are utilised by the issuing co.’s for
investment on fixed capital that is assets
New issue mechanism
A company can rise finance by issuing E.g. Shares in different forms.

1. IPO ( initial Public Offerings)

2. FPO ( Follow Up offer) Right issue.

3. Pvt Placements.

4. Bought out deals (offer for sale).

1.Initial Public Offer:

A initial public offering is process of issuing share to the public for the first time by a
company. fresh issue of shares or selling existing securities by an unlisted company for the
first time is known as Initial Public Offering.
STEPS OR PROCEDURE FOR ISSUE OF NEW ISSUES:
1. Issue of Prospectus: A company, which intends to raise finance from the public through
new issues, must be familiar to public .. This can be done by issuing a prospectus. The
prospectus is any document described or issued as a prospectus and includes any notice,
circular, advertisement or other document inviting deposits from the public, inviting offers
from the public for the subscription or purchase of shares or debentures of a company.
2. Application: When a company issues the prospectus, the investors/public may apply for
the shares offered by the company. These application forms may be obtained from the
brokers, bankers or lead managers, who assist the company in the issue of new shares. The
application may be in the name of individuals or companies. The applicant usually pays an
amount called ‘application money’ along with the application
3. Application for listing of securities: A company can create a favourable impression in
the minds of the investors about its financial soundness, marketability of its shares etc., by
getting its securities listed in stock exchange. The prospectus for new issues should
include details regarding submission of application form for listing of its securities in
recognized stock exchanges.
4. Allotment of shares: On closing the subscription list, the company can allot shares to the
applicants. After allotment of shares, the allot tees become the shareholders of the
company.
5. Allotment / Regret letter: After the allotment of shares, the allotment letters or share
certificates be sent to the allot tees within a reasonable time, say, two months from the date
of closing of subscription list. Letters of regret along with refund orders must be sent to
non allotees.
Advantages of Initial Public Offer
1. Access to capital: the principal motivation for going public is to have access to large
capital. A company that does not tap the public financial market may find it difficult to
grow beyond a certain point for want of capital.
2. Easier to raise new capital: If a private held company wants to raise capital, it must
either go to its existing shareholders or for other investors. This can often be a difficult and
time-consuming process, it becomes easier to find new investors for the business.
3.Stockholder diversification: As a company grows and becomes more valuable, its
founders have most of its wealth tied up in the company. By selling some of their stock in
a public offering the founders can diversify their holding and thereby reduce somewhat the
risk of their personal portfolios.
4. Liquidity to promoters: the stock held in the firm is not liquid. If one of the holders
wants to sell some of the shares, it is hard to find potential buyers, if the sum involved is
large. Even if a buyer is located there is no established price at which to complete the
transaction.
5. Reputation of the company: when companies go for public it enhances the image and
reputation of the company
6. Signals from Markets: It provides useful information about the market to managers.
Every day investors render judgment about the prospects of the firm. Although the market
may not be perfect, it provides a useful reality check.
Disadvantages of Initial Public Offer
(1) Dilution of control: when shares are issued to public it leads to dilution of
proportionate ownership in the firm
(2) Loss of flexibility: the affairs of a public company are subject to fairly comprehensive
regulation. When a non-public company is transformed into a public company there is
some loss of flexibility.
(3) Disclosure: company requires to disclose the information to investors. It cannot
maintain a secrecy over its expansion plans and product.
(4) Accountability: company should be responsible and accountable to public in
management activities as they are the owners of the company
(5) Cost associated with issue: apart from cost issuing shares company from cost issuing
shares company has to incur cost for providing investors for periodical reports, holing
shareholders meetings etc Parties involved in IPO Managers to the issue/Lead managers.
Lead Managers are appointed by the company to regulate the initial public issue.

2. Right issue
Right issue is method of issuing equity/securities in the primary market to existing
shareholders. When company issues additional capital. The shareholders may forfeit this
right partially enable the company to issue additional capital to public.
Essentials of right issue :
(1) Shareholders gets numbers of shares hold by him as per the ratio fixed by the
company
(2) Price per share is determined by the company
(3) Existing shareholders can exercise right and can apply for share.
(4) Rights can be sold.
(5) Rights can be exercised only during a fixed period.
Advantages:
(a) Less expensive as compared to the public issue.
(b) Existing shareholders pattern not disturbed
(c) Management of applications and allotments is less cumbersome.
Disadvantages:
(a) Can be used only existing shareholders.
(b) Not skilled for large issue’

3. Private placements :
Refers to the allotment of shares by a company to few selected sophisticated investors,
mutual funds, insurance companies and banks etc, In this method issue is placed with
small number of finance restitution corporate bodies and high networks individuals. The
financial intermediaries purchase the shares and sell them to investors at a latter date at a
suitable price.
Advantages:
(1) Cost effective: No costs relating to underwriting commission, application & allotment
of shares or publicity etc.
 (2) Time effective: In a public issue the time required for completing the legal formalities
and other formalities usually takes six months. But in the private placement the
requirements to be fulfilled are less.
(3) Structure effective: It can be structured to meet the needs of the entrepreneurs. Here
the terms of the issue can be negotiated with the purchasing institutions easily since they
are few in number.
(4) Access effective: Through private placement a public limited company, listed or
unlisted can mobilize capital. Likewise issue of all size can be accommodated through the
private placement either small or big whereas in the public issue market.
Disadvantages:
(1) Fear of issue getting concentrated in few hands .
(2) Difficult to find target investors group
(3) Artificial scarcity of these securities may be created for hiking up their prices
temporarily, thus misleading investors.
(4) Placement of shares does not generate confidence in the minds of investing public.

4.Brought out deals/offer for sale:

Promoters place their shares with an investment banker who is brought out dealer or
sponsor who offers it to the public later. Existing company off loads a part of the
promoters’ capital to a wholesaler instead of making public issue.

Problems of Indian Primary Markets

1. High risk: Investing in the new issues market can be risky as there is no track record of the
company’s performance, and there is a higher probability of the company failing.
2. Lack of liquidity: Securities in the new issues market may have limited liquidity, making it
difficult for investors to sell their holdings quickly.
3. Limited information: Investors may have limited information about the company, its
financial performance, and future prospects. This can make it difficult to make informed
investment decisions.
4. Possibility of overvaluation: There is a possibility that securities in the primary market may
be overvalued, leading to the investor paying a higher price for the stock than its actual
worth.

Secondary Market
The secondary market is where investors buy and sell securities. Trades take place on the
secondary market between other investors and traders rather than from the companies that
issue the securities. People typically associate the secondary market with the stock market.

Functions of stock exchange

1. Facilitates evaluation of securities: Stock exchange is useful for the evaluation of
industrial securities. This enables investors to know the true worth of their holdings at any
time. Comparison of companies in the same industry is possible through stock exchange
quotations (i.e., price list).
2. Encourages capital formation :Stock exchange accelerates the process of capital
formation. It creates the habit of saving, investing and risk taking among the investing class
and converts their savings into profitable investment. It acts as an instrument of capital
formation. In addition, it also acts as a channel for right (safe and profitable) investment.
3. Provides safety and security in dealings: Stock exchange provides safety, security and
equity (justice) in dealings as transactions are conducted as per well defined rules and
regulations. The managing body of the exchange keeps control on the members. Fraudulent
practices are also checked effectively. Due to various rules and regulations, stock exchange
functions as the custodian of funds of genuine investors.
4. Regulates company management: Listed companies have to comply with rules and
regulations of concerned stock exchange and work under the vigilance (i.e supervision) of
stock exchange authorities.
5. Facilitates public borrowing: Stock exchange serves as a platform for marketing
Government securities. It enables government to raise public debt easily and quickly.
6. Provides clearing house facility: Stock exchange provides a clearing house facility to
members. It settles the transactions among the members quickly and with ease. The members
have to pay or receive only the net dues (balance amounts) because of the clearing house
facility.
7. Facilitates healthy speculation: Healthy speculation, keeps the exchange active. Normal
speculation is not dangerous but provides more business to the exchange. However, excessive
speculation is undesirable as it is dangerous to investors & the growth of corporate sector.
8. Serves as Economic Barometer: Stock exchange indicates the state of health of
companies and the national economy. It acts as a barometer of the economic situation /
conditions.
9. Facilitates Bank Lending: Banks easily know the prices of quoted securities. They offer
loans to customers against corporate securities. This gives convenience to the owners of
securities.
10. Provides liquidity to investment : Stock exchange provides liquidity (i.e easy
convertibility to cash) to investment in securities. An investor can sell his securities at any
time because of the ready market provided by the stock exchange. Stock exchange provides
easy marketability to corporate securities.
11. Provides collateral value to securities : Stock exchange provides better value to
securities as collateral for a loan. This facilitates borrowing from a bank against securities on
easy terms.
12. Offers opportunity to participate in the industrial growth : Stock exchange provides
capital for industrial growth. It enables an investor to participate in the industrial
development of the country.
13. Estimates the worth of securities : Stock exchange provides the facility of knowing the
worth (i.e., true market value) of investment due to quotations (i.e price list) and reports
published regularly by the exchange. This type of information guides investors as regards
their future investments. They can purchase or sell securities as per the price trends (i.e latest
price value) in the market.
 14. Offers safety in corporate investment : An investor can invest his surplus money (i.e
extra money) in the listed securities with reasonable safety. The risk in such investment is
reduced considerably due to the supervision of stock exchange authorities on listed
companies. Moreover, securities are listed only when the exchange authorities are satisfied as
regards legality and solvency of company concerned. Such scrutiny (detailed checking)
avoids listing, of securities of unsound companies (i.e., companies with bad financial status).
15. Continuous and ready market for securities: Stock exchange provides a ready and
continuous market for purchase and sale of securities. It provides ready outlet for buying and
selling of securities. Stock exchange also acts as an outlet/counter for the sale of listed
securities.

Players in Stock Market

1. Individual Investors: Individual investors are private individuals who invest their personal
capital in various financial instruments like stocks, bonds, mutual funds, and real estate.
They typically have diverse investment goals, ranging from wealth accumulation to
retirement planning. Individual investors may vary widely in their risk tolerance, investment
strategies, and financial knowledge.
2. Institutional Investors: Institutional investors are organizations that invest large sums of
money on behalf of others. They include:
• Mutual Funds: These pool money from many investors to invest in a diversified portfolio of
stocks, bonds, or other securities.
• Pension Funds: These manage investments to provide retirement income for employees.
• Insurance Companies: They invest premiums collected from policyholders to generate
returns and meet future claim obligations.
3. Brokers: Stockbrokers are licensed entities who connect investors to the financial markets.
They play a pivotal role in buying and selling stocks for individual and institutional
investors.
4. Regulators: Regulators, such as SEBI in India, supervise financial markets to guarantee
transparent, fair, and lawful operations. These regulators not only set market guidelines but
also conduct audits and implement measures to counteract fraud and ensure market stability.
Their primary objective is to shield investors and uphold the integrity of the market.
5. Clearing Corporation: This organization, linked with a stock exchange, manages the
verification, completion, and transfer of stocks. Essentially, it ensures smooth buying and
selling processes on either side of a deal.

Merits of stock market

1. Investment Opportunities:
The stock market offers a wide range of investment opportunities for investors to choose
from. Investors can invest in different sectors of the economy, such as technology,
healthcare, energy, and finance, and invest in stocks of companies that they believe will
grow in the future. This diversification allows investors to manage risk and maximize
returns.
2. Capital Formation
The stock market plays a crucial role in the capital formation of a country. By allowing
companies to issue shares and raise capital, the stock market provides businesses with the
funds they need to expand their operations and create jobs. This capital formation is
essential for economic growth and development.
3. Liquidity:
 The stock market is a highly liquid market, allowing investors to buy and sell securities at
any time during market hours. This liquidity provides investors with the flexibility to exit
their investments when needed and manage their portfolio efficiently.
4. Transparency
The stock market is a highly regulated market, ensuring that investors have access to
accurate information about the companies they are investing in. This transparency
provides investors with the information they need to make informed investment
decisions.
5. Ownership
By investing in stocks, investors become owners of the company they are investing in.
This ownership provides investors with the opportunity to participate in the growth of the
company and benefit from its success.

Demerits of Stock Market

1. Volatility
The stock market is a highly volatile market, with prices fluctuating frequently based on a
variety of factors such as global events, economic indicators, and company news. These
fluctuations can result in significant losses for investors who have invested in the wrong
stocks. variety of factors such as global
2. Risk
The stock market is a risky investment option as the value of the securities can be affected
by a variety of factors, including market trends, company performance, and global events.
There is always the risk of losing money, and investors should only invest what they can
afford to lose.
3. Fraud
While the stock market is highly regulated, there are still instances of fraud and insider
trading, which can result in significant losses for investors. Investors should be aware of the
risks involved and only invest in regulated markets and companies.
4. Time-Consuming
Investing in the stock market requires a significant amount of time and effort to research
and analyze the companies you are investing in. Investors must stay informed about the
market trends and company news to make informed investment decisions.
5. Emotional Investing
The Stock market capital can be emotional, with investors often making investment
decisions based on emotions rather than logic. This emotional investing can lead to poor
investment decisions and significant losses.

Methods of trading
1. Intraday Trading
Intraday trading, also known as day trading, is a common type of stock market trading.
Although many traders use this strategy to make high profits, it also contains a high element
of risk. Traders involved in day trading buy and sell stocks on the same day.
2. Positional Trading
Similar to day trading, positional trading requires traders to monitor a stock's momentum
before placing a buy order. However, positional trading does not offer the option to sell first
and buy later. It is a medium-term trading strategy for investors ready to focus on long-term
gains while ignoring short-term fluctuations.
3. Swing Trading
Swing traders analyse charts in various durations, such as 5, 10, 15, 30, 60 minutes or even
24 hours. It helps them spot swings in price fluctuations. Sometimes, they may overlap day
or positional trading. Traders often consider this the most challenging type of trade due to
high volatility and constant monitoring. However, volatility is a swing trader’s best friend.
The more volatility a stock has, the better will be the income opportunities. Hence, if a
trader can accurately predict the swings trading, this type of trading is the best strategy they
need.
4. Long-Term Trading
Among the different types of trade, long-term trading is the safest strategy. It suits most
conservative investors who do not mind buying and holding stocks for years. Long-term
traders analyse a stock's growth potential by evaluating balance sheets, reading news,
gaining industrial knowledge, and following economic updates.
5. Scalping
Scalping is a type of day trading. While intraday traders stay invested in the stock market
the whole day to identify opportunities for profits, scalping traders create several short-
duration traders to leverage the waves. Scalpers need high observation skills and experience
to pinpoint trades and place orders. It is common for scalpers to lose a few trades and take a
few others. By the day’s end, they compare the profit-making trades with loss-making ones
to analyse their loss or profit. A scalping trade might last for just a few minutes to an hour.
6. Momentum Trading
Momentum trading is one of the easiest types of trade in the stock market. Traders in this
trading strategy must predict a stock’s movement to identify the right time to enter or exit.
The right time to exit is when a stock is expected to break out. Conversely, the right time to
buy a stock is when the price is low.

BOMBAY STOCK EXCHANGE (BSE)

BSE has an interesting backstory to it. In the 19th century, some traders, with businessman
Premchand Roychand, would gather under a Banyan tree in current Dalal Street. Popularly
known as the Native Share and Stockbrokers Association, this gathering would engage in
purchasing and selling stocks. This association later evolved into the BSE.
Earlier, the BSE worked on a floor trading system in which a licensed broker stands in the
ring and calls out the rising price. The investors, who were outside the BSE, would only find
out about the stock prices in the newspapers. That is why the NSE, or the National Stock
Exchange, went digital, and the prices became public to all investors. Consequently, the NSE
became the favourite spot for investing.
Seeing the shift to digital, the board of BSE decided to change their system as well. In 1995,
BSE received technological aid from CMC Ltd and went digital. Today, the BSE trading area
is called BSE online trading.

Functions of BSE
The following are the primary functions of the Bombay Stock Exchange –

• Price Determination: The prices of securities in the secondary market depend on the
securities’ demand and supply. Thus, BSE helps in this process by constantly valuing all the
 listed securities. And investors can easily track the prices of these securities through the
index popularly known as SENSEX.
• Contribution to the Economy: BSE offers a trading platform for securities of various
companies. The trading process involves continuous reinvestment and disinvestment. This
gives an opportunity for capital formation, funds movement and boosting of the economy.
• Facilitates Liquidity: The most important function of BSE is ensuring a ready platform for
the sale and purchase of securities. This gives investors the confidence to convert the
existing securities into cash anytime. Thus, investors can buy and sell anytime offering them
high liquidity.
• Transactional Safety: BSE ensures that the securities are listed after verifying the
company’s position. Also, all listed companies must adhere to the rules and regulations laid
out by the governing body, i.e. Securities and Exchange Board of India (SEBI).

NATIONAL STOCK EXCHANGE (NSE)

NSE established in 1994, began its operations at the behest of the Indian government to bring
transparency to the country’s capital market. Set up by an assembly of leading financial
institutions and at the recommendations formulated by Pherwani Committee, this stock
exchange comprised diverse shareholding assets from both global and domestic investors.
It was also the first stock exchange in the country to introduce electronic trading facilities,
thus facilitating the integration of investors throughout the country into a single base.
As of April 11, 2023, the total market capitalisation of NSE is approximately USD 3.26
trillion, putting it in 9th place on the list of the largest stock exchanges in the world.
However, unlike the USA, where trading from the corporate sector accounts for about 70% of
the country’s GDP, this sector in India accounts for only 12-14% of its total GDP. Out of this
entire corporate sector, around 7800 companies are listed, with about 4000 among those
trading at Indian stock exchanges. Thus, stock exchange trading accounts for a meagre of 4%
of the country’s GDP.

Functions of NSE
• Market Making: NSE acts as a marketplace where buyers and sellers can trade
various securities, such as equities, bonds, derivatives, and other financial
instruments.

• Price Discovery: Through its advanced electronic trading system, National Stock
Exchange helps in the fair and transparent discovery of prices, ensuring that every
security is traded at its true market value.

• Liquidity Provider: With many listed companies and high trading volumes, NSE
provides ample liquidity to market participants, making entering or exiting
positions easier.

• Clearing and Settlement: NSE has a clearing house that ensures all trades are settled
efficiently and on time. This significantly reduces the risk of default.

• Indices Management: National Stock Exchange is renowned for its market indices
like NIFTY 50, which serve as benchmarks for the Indian economy and various
investment products.

• Risk Management: Through stringent regulations and real -time monitoring, NSE
minimises market risk and ensures a level playing field for all investors.

• Investor Education: NSE takes upon itself to educate investors through various
programs, aiming to improve financial literacy among the masses.

• Data Services: National Stock Exchange provides market data and analytics crucial
for individual and institutional investors to make informed decisions.

• Regulatory Functions: NSE operates under the regulation of the Securities and
Exchange Board of India (SEBI), and it plays a key role in ensuring that market
participants adhere to the laws.

• Technology Upgradation: National Stock Exchange has implemented cutting -edge

technology to make trading more efficient, secure, and accessible.
OVER-THE-COUNTER EXCHANGE OF INDIA (OTCEI)
The Over-The-Counter Exchange of India (OTCEI) is an electronic stock exchange based in
India that consists of small- and medium-sized firms aiming to gain access to
overseas capital markets, including electronic exchanges in the U.S. such as the NASDAQ.
There is no central place of exchange, and all trading occurs through electronic networks.

The OTCEI is based in Mumbai, India, and operates solely over a computer network. The
exchange is recognized by India's Securities Contract Regulation Act, meaning
all listed stocks on the OTCEI benefit equally as other listed securities on other exchanges in
India.
The exchange was established in 1990 to provide investors and companies with an
additional way to trade and issue securities. It arose primarily from small companies in India
finding it difficult to raise capital through mainstream national stock exchanges because they
could not fulfil the stringent requirements to be listed on them.

FEATURES OF OTCEI
1.Use of Modern technology: Unlike other stock market, OTCEI does not have any special
counters and it is an electronically operated stock exchange.

2. Restrictions for other stocks: Stocks and shares listed in other stock exchanges will not be
listed in the OTCEI and similarly, stocks listed in OTCEI will not be listed in other stock
exchanges.

3. Minimum issued capital requirements: Minimum issued equity capital should be Rs. 30
Lakhs, out of which minimum public offer should be Rs. 20 Lakhs.

4. Restrictions for large companies: No company with the issued equity share capital of more
than Rs. 25 Crores is permitted for listing.

5. Base Capital requirement for members: Members will be required to maintain a minimum
base capital of Rs. 4 Lakhs to trade on the permitted or on listed segment.

6. All India Network: The network of counters links OTCEI members, located in different
parts of the country.

7. Satellite facility: The satellite required for OTCEI for its operations is jointly held with
Press Trust of India (PTI) and hence, PTI-OTCEI scan displays the prices of OTCEI’s scripts.

8. Computerization of transactions: Computers at each counter enable to dealers to enter

various transactions or queries or quotes through a central OTCEI computer, using
telecommunications links.

Trading and Settlement Procedure

1] Selecting a Broker or Sub-broker
When a person wishes to trade in the stock market, it cannot do so in his/her individual
capacity. The transactions can only occur through a broker or a sub-broker. So according to
one’s requirement, a broker must be appointed.
Now such a broker can be an individual or a partnership or a company or a financial
institution (like banks). They must be registered under SEBI. Once such a broker is appointed
you can buy/sell shares on the stock exchange.
2] Opening a Demat Account
Since the reforms, all securities are now in electronic format. There are no issues of physical
shares/securities anymore. So an investor must open a dematerialized account, i.e. a Demat
account to hold and trade in such electronic securities.
So you or your broker will open a Demat account with the depository participant. Currently,
in India, there are two depository participants, namely Central Depository Services Ltd.
(CDSL) and National Depository Services Ltd. (NDSL).
3] Placing Orders
Then the investor will actually place an order to buy or sell shares. The order will be placed
with his broker, or the individual can transact online if the broker provides such services. One
thing of essential importance is that the order /instructions should be very clear. Example:
Buy 100 shares of XYZ Co. for a price of Rs. 140/- or less.
Then the broker will act according to your transactions and place an order for the shares at
the price mentioned or an even better price if available. The broker will issue an order
confirmation slip to the investor.
4] Execution of the Order
Once the broker receives the order from the investor, he executes it. Within 24 hours of this,
the broker must issue a Contract Note. This document contains all the information about the
transactions, like the number of shares transacted, the price, date and time of the transaction,
brokerage amount, etc.
Contract Note is an important document. In the case of a legal dispute, it is evidence of the
transaction. It also contains the Unique Order Code assigned to it by the stock exchange.
5] Settlement
Here the actual securities are transferred from the buyer to the seller. And the funds will also
be transferred. Here too the broker will deal with the transfer. There are two types of
settlements,
On the Spot settlement: Here we exchange the funds immediately and the settlement
follows the T+2 pattern. So a transaction occurring on Monday will be settled by Wednesday
(by the second working day)
Forward Settlement: Simply means both parties have decided the settlement will take place
on some future date.

PROBLEMS OF INDIAN STOCK MARKET

1. Business risk

The most frequent risk facing investors who buy individual equities is a company-specific risk.
Investors risk losing their money if the firm they invested in is unable to generate sufficient
sales or profits. The market value of a corporation might also decrease due to subpar operational
performance.

2. Headline danger
A part of company risk that is frequently evaluated is headline risk. This is the danger posed
by media reports that could harm a company's reputation and bottom line. A single
unfavourable headline can trigger a market retaliation against a certain business or an entire
industry, and frequently both. The early November drop of the Tesla stock is a prime
illustration. Elon Musk made waves when he tweeted about whether or not he should divest
10% of his firm shares. Soon after this news hit the news, the stock value plummeted.

3. Market danger

Due to the total systematic risk afflicting the financial markets, investors may suffer losses. A
prime illustration of increased market risk is stock market crashes. Although it cannot be totally
eradicated, market risk can be protected.

4. Liquidity Risk

A significant and obvious risk involved in stock market investing is liquidity risk. Even though
most shares and ETFs have significant liquidity, they are not all created equal. Certain small-
cap stocks or penny stocks may have liquidity problems. Investors may experience difficulties
while buying and selling these products at their fair price.

5. Low margin and high brokerage

Brokers are still necessary for the market to operate smoothly, despite the fact that it is now
much more accessible. They demand large brokerage fees, which reduces investors' profit
margins and detracts from the appeal of the investment option.

6. Inadequate knowledge

The investors' ignorance of their investments and the firms they invest in is one of the obvious
drawbacks of the stock market. The majority of issuers rely on broker recommendations or
market trends, which might not be their greatest advantage.

The majority of shareholders are unable to analyze and make use of this information to their
advantage, even though the SEBI & stock exchanges compel issuer businesses to disclose
pertinent knowledge for the benefit of investors. The regulator has a pressing need for investor
education and training activities.

7. Time-consuming

The act of trading stocks has gotten easier and faster thanks to the development of online
trading. Still, the registration process, such as registering a Demat account, takes a little longer.
The data and analysis needed before making a valid investment, however, still require diligent
work because it is a one-time activity.

SECURITIES EXCHANGE BOARD OF INDIA (SEBI)

SEBI is a regulator for the securities market in India. It was established during the year 1988
and given statutory powers on 12th April 1992 through the SEBI Act.
Objectives:
 ➢ To protect the interest of the investors.

➢ To regulate the securities market

➢ To promote efficient services by brokers, merchant bankers and other intermediaries.

➢ To promote orderly and healthy growth of the securities market in India.

➢ To create proper market environment.

➢ To regulate the operations of financial intermediaries.

➢ To provide suitable education and guidance to investors.

Features of SEBI
1.The SEBI shall be a body corporate established under SEBI ACT, with perpetual
succession and a common seal.
2.The head office of the board shall be at Mumbai. SEBI can have branch offices at other
places in India.
3.The board shall consist of the following members.
(i)A chairman
(ii)Two members from amongst the officials of the Ministries of the Central Government
dealing with finance and law.
(iii) One member from amongst the officials of the Reserve Bank of India.
(iv) Two other members - Chairman and other members of the Board are appointed by the
central Government.
4. The general superintendence, direction and management of the SEBI shall vest in the
Board of members. Those members exercise all powers and do all acts and things which may
be exercised by the Board (SEBI)
5. Central Government shall have the power to remove a member, or the chairman appointed
to the Board
6. Central government shall provide finance and also make appropriate grants to the Board.
7. Central government has power to issue direction to the board on the policy matters and
shall 31 supersede the board in the event of default by the Board.
Functions of SEBI
1. Protective Functions:
These functions are performed by SEBI to protect the interest of investor and provide safety
of investment. As protective functions SEBI performs following functions:
(i) It Checks Price Rigging:
Price rigging refers to manipulating the prices of securities with the main objective of
inflating or depressing the market price of securities. SEBI prohibits such practice because
this can defraud and cheat the investors.
(ii) It Prohibits Insider trading:
Insider is any person connected with the company such as directors, promoters etc. These
insiders have sensitive information which affects the prices of the securities. This information
is not available to people at large but the insiders get this privileged information by working
inside the company and if they use this information to make profit, then it is known as insider
trading, e.g., the directors of a company may know that company will issue Bonus shares to
its shareholders at the end of year and they purchase shares from market to make profit with
bonus issue. This is known as insider trading. SEBI keeps a strict check when insiders are
buying securities of the company and takes strict action on insider trading.
(iii) SEBI prohibits fraudulent and Unfair Trade Practices:
SEBI does not allow the companies to make misleading statements which are likely to induce
the sale or purchase of securities by any other person.
(iv) SEBI undertakes steps to educate investors so that they are able to evaluate the securities
of various companies and select the most profitable securities. 32
(v) SEBI promotes fair practices and code of conduct in security market by taking following
steps:
(a) SEBI has issued guidelines to protect the interest of debenture-holders wherein companies
cannot change terms in midterm.
(b) SEBI is empowered to investigate cases of insider trading and has provisions for stiff fine
and imprisonment.
(c) SEBI has stopped the practice of making preferential allotment of shares unrelated to
market prices.
Regulatory functions:

➢ Regulating the business in stock exchanges and any other securities markets.

➢ Registering and regulating the working of stockbrokers, sub-brokers, share transfer agents,
bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers,
underwriters, portfolio managers, investment advisers and such other intermediaries who may
be associated with securities markets in any manner.

➢ Registering and regulating the working of venture capital funds and collective investment
schemes including mutual funds.

➢ Promoting and regulating self-regulatory organizations

➢ Prohibiting fraudulent and unfair trade practices relating to securities markets.

➢ Prohibiting insider trading in securities.

➢ Regulating substantial acquisition of shares and take-over of companies.

Development functions:

➢ Promoting investors' education and training of intermediaries of securities markets

➢ Conducting research and published information useful to all market participants

. ➢ Promotion of fair practices, code of conduct for self-regulatory organizations.

➢ Promoting self-regulatory organizations

Powers:

➢ Power to call periodical returns from recognized stock exchanges.

➢ Power to make enquiries to be made in relation to affairs of stock exchanges

➢ Power to grant approval to byelaws of recognized stock exchanges

➢ Power to compel listing of securities

➢ Power to control and regulate stock exchange

➢ Power to grant registration to market intermediaries

➢ Power to call for any information from recognized stock exchanges

➢ Power to levy fee other charges

REFORMS IN SECONDARY MARKET

Setting up of National Stock Exchange (NSE):

• NSE was set up in November 1992 and started its operations in 1994; which
has now developed into a sophisticated, electronic market, which ranked fourth
in the world by equity trading volume

Over the Counter Exchange of India (OTCEI)

• It was set in 1992. It was promoted by a consortium of leading financial

institutions of India including UTI, ICICI, IDBI, IFCI, LIC and others.
• It is an electronic national stock exchange listing an entirely new set of
companies which will not be listed on other stock exchanges

Disclosure and Investor Protection (DIP) Guidelines for New Issues

• In order to remove inadequacies and systematic deficiencies, to protect the

interests of investors and for the orderly growth and development of the
securities market, the SEBI has put in place DIP guidelines to govern the new
issue activities.
• Companies issuing capital in the primary market are now required to disclose
all material facts and specify risk factors with their projects

Depository System
 • A major reform in the Indian Stock Market has been the introduction of
depository system and scrip less trading mechanism since 1996.
• Before this, the trading system was based on physical transfer of securities.
• A depository is an organization which holds the securities of shareholders in
electronic form, transfers securities between account holders, facilitates
transfer of ownership without handling securities and facilitates their
safekeeping.

The National Securities Clearing Corporation Ltd. (NSCL)

• The NSCL was set up in 1996. It has started guaranteeing all trades in NSE
since July 1996.
• The NSCL is responsible for post-trade activities of the NSE. Clearing and
settlement of trades and risk management are its central functions .

Trading in Central Government Securities

• In order to encourage wider participation of all classes of investors, including

retail investors, across the country, trading in government securities has been
introduced from January 2003.
• Trading in government securities can be carried out through a nationwide,
anonymous, order-driver, screen-based trading system of stock exchanges in
the same way in which trading takes place in equities.

Mutual Funds

• Emergence of diversified mutual funds is one of the most important

developments of Indian capital market.
• Their main function is to mobilize the savings of general public and invest
them in stock market securities.
• Mutual funds are an important avenue through which households participate in
the securities market.