Chapter -Four

Securities Market and Trading

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Introduction

 A market is any organized system for connecting

buyers and sellers.

 Financial markets are no different. In financial markets

funds are exchanged.

 The sellers of the funds have excess funds and the

buyers need those funds.

 The equilibrium in these markets determines the price

and quantity of financial instruments.

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Definition

 A financial market can be defined as an

institution or arrangement that facilitates the
exchange of financial instruments, including
deposits & loans, stocks, bonds etc.

 A Financial Market is a market in which

financial assets (securities) can be purchased
or sold.
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Con’t

• Financial markets facilitate transfers of funds

from person or business without investment
opportunities (i.e., “Lender-Savers”, or “Surplus
Unit”) to those who have investment
opportunities (i.e., “Borrower-Spenders”, or
“Deficit Unit”).
• Both buyers and sellers benefit from the market

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Con’t

 There are many security markets

 Markets may have a physical location
The New York Stock Exchange

 Or exist only as computer networks

 The London Stock Exchange

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 Characteristics of a Good Financial Market

• Availability of past transaction information

– must be timely and accurate
• Liquidity
– marketability
– price continuity
– Depth: large number of buyers and sellers
• Low Transaction costs
• Rapid adjustment of prices to new information
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Functions of Financial Market

1. Transfer of resources: Financial markets facilitate

the transfer of real economic resources from
lenders to ultimate borrowers.
2. Enhancing income: financial markets allow
lenders earn interest /dividend on their surplus
investible funds, thus contributing to the
enhancement of the individual & the national
income.
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Con’t

3. Productive usage: Financial markets allow for

the productive use of the funds borrowed, thus
enhancing the income & the gross national
production.
4. Capital formations: financial markets provide a
channel through which new savings flow to aid
capital formation of a country.

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Con’t

5. Price determination: financial markets allow for

the determination of the price of the traded
financial asset through the interaction of buyers &
sellers, i.e., through demand & supply.
6. Sale mechanism: financial markets provide a
mechanism for selling of a financial asset by an
investor so as to offer the benefits of marketability
& liquidity of such assets.
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Con’t

7. Information: the activities of the

participants in the financial market result
in the generation and the consequent
dissemination of information to the various
segments of the market, so as to reduce the
cost of transaction of financial assets.

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Organization of the Securities Market
 Financial markets includes:

1. Primary market
2. Secondary market
3. Third market
4. Fourth Market
5. Money market
6. Capital markets
7. Derivative market
8. Foreign exchange markets
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Primary markets

• Primary market is a market in which newly-

issued securities are sold to initial buyers by the
corporation or government borrowing the funds.
• Securities available for the first time are offered
through the primary market.
• That is, in the primary market, companies interact
with investors directly while in the secondary
market investors interact with themselves.
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Features of Primary Market

• It is related with new issues

• It has no particular place: Primary market is not
the name of any particular place but the activity
of bringing new issues.
• It has various methods of floating capital like
public issue, private placement offer for sale.

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Con’t

New issues are divided into two groups

1. Initial public offerings (IPOs) - a firm selling
its common stock to the public for the first time
2. Seasoned new issues (also known as Follow
Public Offering)- new shares offered by firms
that already have stock outstanding

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Con’t

• The traditional middleman in the primary

market is called an investment banker.
• Investment banking firms play an important
role in many primary market transactions by
underwriting securities: they guarantee a price
for a corporation’s securities and then sell those
securities to the public.

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Con’t

• That is, it buys the new issue from the issuer at

an agreed upon price and hopes to resell it to the
investing public at a higher price.
• Usually, a group of investment bankers joins to
underwrite a security offering and form what is
called an underwriting syndicate.

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Con’t

• Companies raise new capital in the

primary market through:
` 1. Public issues
2. Right issue
3. Private placement

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Con’t

1. In public issue/ offering: The will be established

companies sell new securities to the public. The
company invites the general public to purchase
the new security.
2. In right issue: Offering of securities may be made
only to the existing shareholders. Thus, when
securities are offered only to the company’s
existing shareholders, it is called right issue.
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Con’t

3. Private placement: Instead of public issue of

securities, a company may offer securities privately
only to a few investors (such as institutional investors
like mutual fund).
• The investment bankers may act as a finder, that is, he
locates the institutional buyer for a fee.

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Functions of Primary Market

 The main service functions of the primary market are:

a.Origination: deals with the origin of the new issue (i.e., the
nature of the security, the size of the issue, timing of the
issue, and floatation method of the issue.
b. Underwriting: It makes the share predictable and removes
the element of uncertainty in the subscription.
c. Distribution: refers to the sale of securities to investors.

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Con’t

es
riti
cu

Underwriter
se

Issuer
Company Investors
Broker-Dealer

ds
n
Fu
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Con’t

Issuer

Investment
banker

Syndicate Syndicate Syndicate

member 1 member 2 member 3

Broker Broker Broker Broker Broker Broker

23 23
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Secondary markets

 Market where outstanding securities are bought

and sold by investors.
 The issuing unit does not receive any funds in a
secondary market transaction
 That is, the issuer of the asset doesn’t receive
funds from the buyer.

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Features of Secondary Market

• It creates liquidity
• It comes after primary market
• It has a particular place
• It encourages new investments

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Functions of Secondary Markets

• Provides regular information about the value of

security.
• Offers to investors liquidity for their assets.
• It brings together many interested parties & so can
reduce the costs of searching for likely buyers &
sellers of the assets.
• It keeps the cost of transactions low.

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 Con’t

• There are a number of professional participants of a

securities market and these include; broker-dealers,
market-makers, investment managers, speculators as
well as those providing the infrastructure, such as
clearing-houses and securities depositories.

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Requirements for Listing
• Securities to be listed in stock exchange center,
companies have to meet certain minimum
requirements with respect to:
– The number of shareholders
– Trading activity
– The number and value of shares held in public
hands
– Annual earnings
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 Relationship between the primary and secondary
market

1. The new issue market can’t properly function without the

secondary market. The secondary market or the stock
market provides liquidity for the issued securities.

2. The stock exchange through their listing requirements,

exercise control over the primary market. The company
seeking for listing on the respective stock exchange has to
comply with all the rules and regulations given by the
stock exchange.
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Con’t

3. The primary market provides a direct link between the

prospective investors and the company. By providing
liquidity and safety, the stock market encourages the
public to subscribe to the new issues. The marketability
and capital appreciation provides in the stock market are
the major factors that attract the investing public
towards the stock market. Thus, it provides an indirect
link between the savers and the company.

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OTC market

• Over-the-counter (OTC) or off-exchange trading is to

trade financial instruments such as stocks, bonds,
commodities or derivatives directly between two
parties.
• It is a negotiated market (investors negotiate directly
with dealers or another investor)

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Con’t

• OTC stocks are not usually listed nor traded on any

stock exchanges, though exchange listed stocks can
be traded OTC on the third market.
• Any security can be traded in OTC (no minimum
requirement) as long as a registered dealer wants to
make a market.

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 Exchange Centres

• An exchange can be defined as any organization,

association, or group of persons, whether incorporated or
unincorporated, which constitutes, maintains, or provides a
market place or facilities for bringing together purchasers
and sellers of securities.

• An exchange is a physical or virtual meeting place drawing

together brokers, dealers and traders to facilitate the

buying and selling of securities.

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Con’t

• Exchanges include the floor-based markets and

screen-based systems provided by Electronic
Communications Networks (ECNs).
• Exchanges are intended to provide for orderly, liquid
and continuous markets for the securities they trade.

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The End!

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