Chapter 10 (b):

Secondary Markets
Secondary Markets
Functions of the secondary markets

I. Provides regular information to the issuing company about the value of the asset.
ii. Offers the opportunity for the original buyer of an asset to reverse the investment by
selling it for cash.
iii. Offers liquidity for the traders.

01. Stock Exchange: The organized stock market that is legally permitted by the
appropriate government authority for trading/exchanging existing securities is
known as stock exchange.

02. Over-the-counter market: The unorganized stock market that is not legally
permitted by the appropriate government authority for trading/exchanging all types
of existing securities is known as over-the-counter (OTC) market. In this market
securities are traded without participation of brokers or members.
 Secondary Markets
03. Third market: The unorganized stock market that is not legally permitted by the
appropriate government authority for trading/exchanging listed securities is known as third
market. In this market securities are traded without participation of brokers or members.
04. Fourth market: The organized stock market that is legally permitted by the appropriate
government authority for trading/exchanging listed securities through computer, internet
and telephone facilities is known as fourth market. In this market securities are traded with
participation of brokers or members.
05. Commission broker: The independent member of the exchange who executes orders on
behalf of investors in exchange of commission having seat on the exchange is known as
commission broker.
06. Floor broker: The independent members of the exchange who own their seats and handle
work for commission brokers when brokers have too many orders to handle are known as
floor broker.
07. Specialist: The expert and experienced party about stock trading who is positioned in the
central of the trading process who maintains a market in one or more listed securities. All
trading in a given stock takes place at one location on the floor of the exchange called the
specialists post. Basically, specialists make the market as broker or dealer.
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08. Market order: Orders placed by different investors those will be executed at available
best prices are called market order. The execution of these orders is dependent on
brokers and they have liberty about this.
09. Limit order: Orders placed by different investors by mentioning the price range those
will be executed only within given range of prices are called limit order. The execution of
these orders is not dependent on brokers and they have no liberty about this. In case of
buy there is given lower limit and in case of sell there is given higher limit.
10. Block sales: To trade of 10000 or more shares in a single transaction by institutional
investors is called block trade.
11. Program trade: A program trade is a coordinated purchase or sale of entire portfolio of
stocks. Many trading strategies require that an entire portfolio of stocks be purchased or
sold simultaneously in a coordinated program.
12. Settlement: To meet up the buy and sell transactions between seller and buyer by
making delivery of securities in exchange of receiving payment and making payment in
exchange of receiving securities is called settlement. This settlement is done by brokers
for commission that is charged both times of buying and selling. It also means the time is
required to meet up the transaction.
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13. Trading cost: Costs imposed on the investor as brokerage commission and
transfer tax for buying and selling securities are called trading costs.
14. Buying on margin: To buy securities not by contributing total transaction
amount rather by taking fund from brokers as loan is called buying on margin.
15. Short sale: To sell securities by borrowing from others with the expectation of
decreasing future price on terms and conditions of returning back those
securities to the owner is called short sale.
16. Self regulation: To delegate authority and responsibility to the secondary
exchange/market by the Securities and Exchange Commission for day to day
oversight of trading is termed as self regulation.
17. Circuit breaker: To impose restriction on changing price within a certain
percentage of a particular security on a particular trading day is known as
circuit breaker.
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18. Insider trading: To trade of securities by internal parties for making profit is called
insider trading. It is illegal for any one to transact in securities to profit from inside
information, that is, private information held by officers, directors or major shareholders
that has not yet been published.
19. Continuous market: It means that prices are determined continuously throughout the
trading day as buyers and sellers submit orders.
20. Call market: The market in which orders are batched or grouped together for
simultaneous execution at the same price i.e. at certain times in the trading day, a market
maker holds an auction for a stock.
21. Perfect market: Financial market free from transaction costs or frictions for dealing
with financial assets is known as perfect market. Friction includes commissions charged
by brokers, bid-ask spread charged by dealers, order handling and clearance charges,
taxes and transfer fees, information costs, trading restrictions and restrictions on market
makers.