Secondary Market

Secondary Market
⚫ A secondary market is a platform where investors can
easily buy or sell securities once issued by the original
issuer, be it a bank, corporation, or government entity.
Also referred to as an aftermarket, it allows investors to
trade securities freely without interference from those
who issue them.
 Functions of Secondary Market

It’s a continuous market for securities

• You can trade in shares without risk and enjoy

continuous opportunities for trading.

You can evaluate securities:

• The prices of shares give a clear idea on the performance

of Companies.

You can mobilize savings:

• Public savings are mobilized through mutual funds,

REITs among others. Ordinary citizens get an
opportunity to invest small amounts inmutual funds.
 Functions of Secondary Market

Stock markets encourage healthy speculation:

• Stock markets offer opportunities for healthy speculation and

the chance to reap high profits in the markets.

Easy movement of funds:

• Stock exchanges like BSE and NSE help investors and

Companies sell/buy shares.

BSE and NSE protect investors:

• SEBI regulates stock exchanges and protects the interests of

investors.
 Functions of Secondary Market

Secondary market offers liquidity:

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

Secondary markets are an economic barometer:

• You get an idea on the economic conditions of the Nation based

on the stock markets.
• Secondary market regulates Companies:
• Stock markets force Companies to follow rules and regulations.
It regulates the management of Companies

Stock markets attract foreign capital:

• The stock markets attract foreign capital into India. FIIs and FPIs
jump into Indian stock markets as they offer high returns. The
stockmarkets help strengthen the currency of the Nation.
 Secondary Market Instruments
• Equity offers ownership in a business. When you
Equity: invest in the equity of a Company, you are part-
owner of the business.

• These are ordinary shares and represent fractional

Equity Shares: ownership of a Company. If you hold equity shares,
you enjoy voting rights in theCompany.

• It is the new issue of shares to existing

Right Issues: shareholders in the ratio already held.

• You get additional shares at no additional cost,

Bonus Shares: based on shares already held.

Preference • If you own preference shares, you are entitled to a

fixed dividend. You get paid first, before dividends
Shares: are paid to ordinary equity shareholders.
 Secondary Market Instruments

Security • Security receipt is issued by an ARC (asset reconstruction

Company) or a securitization Company, to a qualified

Receipts:
institutional investor, giving him a right/interest/title in the
issued financial asset in securitization.

Government • Government Securities also called G-Secs, enjoy a Sovereign

Guarantee. G-Secs are issued by the RBI on behalf of the

Securities:
Government. G-Secs offer fixed coupon/interest rates and are
paid half-yearly. Maturities range from 1 year up to 20 years.

• Debentures are bonds issued by Companies bearing a fixed rate

Debentures: of interest and payable half-yearly on specific dates. Principal is

repaidon maturity. Debentures are secured against assets of the
Company in favor of debenture holders.

• Companies, Government agencies and Municipal bodies issue

Bonds: bonds. An investor in bonds lends money to the issuer

(Company) and the issuer promises to repay the money on a
fixed date called maturity date.
Participants Involved Settlement
Clearing Corporation

• Clearing corporation is one of the major participants involved in

clearing and settlement process in stock market. The responsibility for
clearing and settlement of trade executed at the stock exchange lies on
the National Securities Clearing Corporation Limited (NSCCL). It is also
in charge of risk management and is obligated for meeting all settlement
regardless of the member defaults.

Clearing Members/Custodians

• They are another participant in the clearing and settlement process in

Indian stock market. When trading members place deals in the stock
exchange, the same is moved to NSCCL, which transfers them to the
clearing members. The clearing member is in charge of determining the
position of share to suit the trade.

Clearing banks

• Clearing banks are responsible for the settlement of funds. There are 13
clearing banks, and each clearing member needs to open a clearing
account with either one of them. In case of a pay-out, clearing members
receive funds in the clearing account and in case of pay-in they need to
make funds available.
Participants Involved Settlement
Depositories

• There are two depositories in India – National Securities

Depository Limited (NSDL) and Central Depository
Services Limited (CDSL). These two depositories hold
your Demat account, and clearing members also need
to maintain a clearing pool account with them.
• Clearing members need to transfer the securities to the
clearing pool account they hold with the depositories
on the date of settlement.

Professional Clearing Members

• These are special category members appointed by the

NSCCL. However, note that they are not allowed to
trade, and they can only clear and settle trades executed
for their clients. Professional clearing members
generally constitute banks, custodians and so on.
How Trades are Cleared and Settled in the
Stock Market?
The stock exchange transfers the details of every trade to the clearing corporation on the T day
when trade is executed

The clearing corporation confirms with the clearing members before they close the trade. Once
they receive confirmation, they determine the obligations of the clearing member

After the details are confirmed the clearing banks must have sufficient funds, and depositories
should make the shares available

The clearing corporations get funds and securities from clearing banks and depositories for
purchase and sale transactions respectively.

In the case of the purchase transaction, the clearing member receives securities and in the case of
sale transaction, the clearing member receives money in the clearing account.
 Brokers
⚫ Brokers are registered members of the stock exchange
who work as agents on behalf of the investing public.
So, they are the intermediaries between investors and
the stock exchange.
The Role of Brokers in Stock Market:
⚫ Suggest the Best Share Deals: notifying them when
to buy or sell stocks.
⚫ Manages Stock Trading: Stockbrokers trade after
receiving instructions from investors and implement
them on a stock exchange.
⚫ Charges a Brokerage Fee against Services: Full-
service stockbrokers charge a brokerage fee for their
services to investors.
 Portfolio Management Services
⚫ Portfolio Management Services account is an
investment portfolio in Stocks, Debt, and fixed income
products managed by a professional money manager,
that can potentially be tailored to meet specific
investment objectives.
Types of Portfolio Management Services
⚫ Discretionary PMS India
Where the investment is at the discretion of the fund
manager & the client has no intervention in the
investment process.
⚫ Non-Discretionary PMS
Under this service, the portfolio manager only suggests
investment ideas. The choice, as well as the timings of the
investment decisions, rest solely with the investor.
However, the execution of the trade is done by the
portfolio manager.