Secondary market

SECONDARY MARKET

What is meant by Secondary market?

Secondary market refers to a market where securities are traded after being initially offered to the public in the primary market and/or listed on the Stock Exchange. Majority of the trading is done in the secondary market. Secondary market comprises of equity markets and the debt markets.

What is the role of the Secondary Market?

For the general investor, the secondary market provides an efficient platform for trading of his securities. For the management of the company, Secondary equity markets serve as a monitoring and control conduit—by facilitating value-enhancing control activities, enabling implementation of incentive-based management contracts, and aggregating information (via
price discovery) that guides management decisions.

What is the difference between the Primary Market and the Secondary Market?

In the primary market, securities are offered to public for subscription for the purpose of raising capital or fund. Secondary market is an equity trading venue in which already existing/pre-issued securities are traded among investors. Secondary market could be either auction or dealer market. While stock exchange is the part of an auction market, Over-the-Counter (OTC) is a part of the dealer market.

What is the role of a Stock Exchange in buying and selling shares?

The stock exchanges in India, under the overall supervision of the regulatory authority, the Securities and Exchange Board of India (SEBI), provide a trading platform, where buyers and sellers can meet to transact in securities. The trading platform provided by NSE is an electronic one and there is no need for buyers and sellers to meet at a physical location to trade. They can trade through the computerized trading screens available with the NSE trading members or the internet based trading facility provided by the trading members of NSE.

What is Demutualisation of stock exchanges?

Demutualisation refers to the legal structure of an exchange whereby the ownership, the management and the trading rights at the exchange are segregated from one another.

How is a demutualised exchange different from a mutual exchange?

In a mutual exchange, the three functions of ownership, management and trading are concentrated into a single Group. Here, the broker members of the exchange are both the owners and the traders on the exchange and
they further manage the exchange as well. This at times can lead to conflicts of interest in decision making. A demutualised exchange, on the other hand, has all these three functions clearly segregated, i.e. the ownership, management and trading are in separate hands.

Currently are there any demutualised stock exchanges in India?

Currently, two stock exchanges in India, the National Stock Exchange (NSE) and Over the Counter Exchange of India (OTCEI) are demutualised.

What is Screen Based Trading?

The trading on stock exchanges in India used to take place through open outcry without use of information technology for immediate matching or recording of trades. This was time consuming and inefficient. This imposed limits on trading volumes and effic iency. In order to provide efficiency, liquidity and transparency, NSE introduced a nationwide, on-line, fully-automated screen based trading system (SBTS) where a member can punch into the computer the quantities of a security and the price at which he would like to transact, and the transaction is executed as soon as a matching sale or buy order from a counter party is found.

What is NEAT?

NSE is the first exchange in the world to use satellite communication technology for trading. Its trading system, called National Exchange for Automated Trading (NEAT), is a state of-the-art client server based application. At the server end all trading information is stored in an in-memory database to achieve minimum response time and maximum system availability for users. It has uptime record of 99.7%. For all trades entered into NEAT system, there is uniform response time of less than one second.

How to place orders with the broker?

You may go to the broker’s office or place an order on the phone/internet or as defined in the Model Agreement, which every client needs to enter into with his or her broker.

How does an investor get access to internet based trading facility?

There are many brokers of the NSE who provide internet based trading facility to their clients. Internet based trading enables an investor to buy/sell securities through internet which can be accessed from a computer at the investor’s residence or anywhere else where the client can access the internet. Investors need to get in touch with an NSE broker providing this service to avail of internet based trading facility.

What is a Contract Note?

Contract Note is a confirmation of trades done on a particular day on behalf of the client by a trading member. It imposes a legally enforceable relationship between the client and the trading member with respect to purchase/sale and settlement of trades. It also helps to settle disputes/claims between the investor and the trading member. It is a prerequisite for filing a complaint or arbitration proceeding against the trading member in case of a dispute. A valid contract note should be in the prescribed form, contain the details of trades, stamped with requisite value and duly signed by the authorized signatory. Contract notes are kept in duplicate, the trading member and the client should keep one copy each. After verifying the details contained therein, the client keeps one copy and returns the second copy to the trading member duly acknowledged by him.

What details are required to be mentioned on the contract note issued by the stock broker?

A broker has to issue a contract note to clients for all transactions in the form specified by the stock exchange. The contract note inter-alia should have following:

§Name, address and SEBI Registration number of the Member broker.
§Name of partner/proprietor/Authorised Signatory.
§Dealing Office Address/Tel. No./Fax no., Code number of the member given by the Exchange.
§Contract number, date of issue of contract note, settlement number and time period for settlement.
§Constituent (Client) name/Code Number.
§Order number and order time corresponding to the trades.
§Trade number and Trade time.
§Quantity and kind of Security bought/sold by the client.
§Brokerage and Purchase/Sale rate.
§Service tax rates, Securities Transaction Tax and any other charges levied by the broker.
§Appropriate stamps have to be affixed on the contract note or it is mentioned that the consolidated stamp duty is paid.
§Signature of the Stock broker/Authorized Signatory.

What is the maximum brokerage that a broker can charge?

The maximum brokerage that can be charged by a broker from his clients as commission cannot be more than 2.5% of the value mentioned in the respective purchase or sale note.

Why should one trade on a recognized stock exchange only for buying/selling shares?

An investor does not get any protection if he trades outside a stock exchange. Trading at the exchange offers investors the best prices prevailing at the time in the market, lack of any counter-party risk which is assumed by the clearing corporation, access to investor grievance and redressal mechanism of stock exchanges, protection upto a prescribed limit, from the Investor Protection Fund etc.

How to know if the broker or sub broker is registered?

One can confirm it by verifying the registration certificate issued by SEBI. A broker's registration number begins with the letters ‘INB’ and that of a sub broker with the letters ‘INS’.

What precautions must one take before investing in the stock markets?

Here are some useful pointers to bear in mind before you invest in the markets:

Make sure your broker is registered with SEBI and the exchanges and do not deal with unregistered intermediaries.

Ensure that you receive contract notes for all your transactions from your broker within one working day of execution of the trades.

All investments carry risk of some kind. Investors should always know the risk that they are taking and invest in a manner that
matches their risk tolerance.

Do not be misled by market rumours, luring advertisement or ‘hot tips’ of the day.

Take informed decisions by studying the fundamentals of the company. Find out the business the company is into, its future   prospects, quality of management, past track record etc Sources of knowing about a company are through annual reports, economic magazines, databases available with vendors or your financial advisor.

If your financial advisor or broker advises you to invest in a company you have never heard of, be cautious. Spend some time checking out about the company before investing. Do not be attracted by announcements of fantastic results/news reports, about a company. Do your own research before investing in any stock. Do not be attracted to stocks based on what an internet website promotes, unless you have done adequate study of the company.

Investing in very low priced stocks or what are known as penny stocks does not guarantee high returns.

Be cautious about stocks which show a sudden spurt in price or trading activity.

Any advise or tip that claims that there are huge returns expected, especially for acting quickly, may be risky and may to lead to losing some, most, or all of your money.

What Do’s and Don’ts should an investor bear in mind when investing in the stock markets?

Ensure that the intermediary (broker/sub-broker) has a valid SEBI registration certificate.

Enter into an agreement with your broker/sub-broker setting out terms and conditions clearly.

Ensure that you give all your details in the ‘Know Your Client’ form. Ensure that you read carefully and understand the contents of the ‘Risk Disclosure Document’ and then acknowledge it.

Insist on a contract note issued by your broker only, for trades done each day.

Ensure that you receive the contract note from your broker within 24 hours of the transaction.

Ensure that the contract note contains details such as the broker’s name, trade time and number, transaction price, brokerage, service tax, securities transaction tax etc. and is signed by the Authorised Signatory of the broker.

To cross check genuineness of the transactions, log in to the NSE website (www.nseindia.com) and go to the trade verification facility extended by NSE at www.nseindia.com/content/equities/eq_trdverify.htm.
and securities from your broker. Cross check and reconcile your accounts promptly and in case of any discrepancies bring it to the attention of your broker immediately.   Please ensure that you receive payments/deliveries from your broker, for the transactions entered by you, within one working day of the payout date. Ensure that you do not undertake deals on behalf of others or trade on your own name and then issue cheques from a family members ’/ friends’ bank accounts. Similarly, the Demat delivery instruction slip should be from your own Demat account, not from any other family members’/friends’   accounts. Do not sign blank delivery instruction slip(s) while meeting security payin obligation.
No intermediary in the market can accept deposit assuring fixed returns. Hence do not give your money as deposit against assurances of returns.

‘PortfolioManagement Services’ couldbe offered only by intermediaries having specific approval of SEBI for PMS. Hence, do
not part your funds to unauthorized persons for Portfolio Management.
§Delivery Instruction Slip is a very valuable document. Do not leave signed blank delivery instruction slip with anyone. While meeting pay
in obligation make sure that correct ID of authorised intermediary is filled in the Delivery Instruction Form.
§Be cautious while taking funding form authorised intermediaries as these transactions are not covered under Settlement Guarantee
mechanisms of the exchange.
§Insist on execution of all orders under unique client code allotted to you. Do not accept trades executed under some other client code to your account.
§When you are authorising someone through ‘Power of Attorney’ for operation of your DP account, make sure that:

§your authorizatio n is in favour of registered intermediary only.
§authorisation is only for limited purpose of debits and credits arising out of valid transactions executed through that intermediary only.
§you verify DP statement periodically say every month/fortnight to ensure that no unauthorised transactions
have taken place in your account.
§authorization given by you has been properly used for the purpose for which authorization has been given.
§in case you find wrong entries please report in writing to the authorized intermediary.
§Don’t accept unsigned/duplicate contract note.
§Don’t accept contract note signed by any unauthorised person.
§Don’t delay payment/deliveries of securities to broker.
§In the event of any discrepancies/disputes, please bring them to the notice of the broker immediately in writing (acknowledged by the broker) and ensure their prompt rectification.
§In case of sub-broker disputes, inform the main broker in writing about the dispute at the earliest and in any case not later than 6 months.
§If your broker/sub-broker does not resolve your complaints within a reasonable period (say within 15 days), please bring it to the
attention of the ‘Investor Grievances Cell’ of the NSE.
§While lodging a complaint with the ‘Investor Grievances Cell’ of the NSE, it is very important that you submit copies of all relevant documents like contract notes, proof of payments/delivery of shares etc. alongwith the complaint. Remember, in the absence of sufficient documents, resolution of complaints becomes difficult.
§Familiarise yourself with the rules, regulations and circulars issued by stock exchanges/SEBI before carrying out any transaction.

What are the products dealt in the Secondary Markets?

Following are the main financial products/instruments dealt in the Secondary market which may be divided broadly into Shares and Bonds: Shares:

Equity Shares: An equity share, commonly referred to as ordinary share, represents the form of fractional ownership in a business venture.

Rights Issue/ Rights Shares: The issue of new securities to existing shareholders at a ratio to those already held, at a price. For e.g. a 2:3 rights issue at Rs. 125, would entitle a shareholder to receive 2
shares for every 3 shares held at a price of Rs. 125 per share.

Bonus Shares: Shares issued by the companies to their shareholders free of cost based on the number of shares the shareholder owns.

Preference shares: Owners of these kind of shares are entitled to a fixed dividend or dividend calculated at a fixed rate to be paid regularly before dividend can be paid in respect of equity share. They also enjoy priority over the equity shareholders in payment of surplus. But in the event of liquidation, their claims rank below the claims of the company’s creditors, bondholders/debenture holders.

Cumulative Preference Shares: A type of preference shares on which dividend accumulates if remained unpaid. All arrears of preference dividend have to be paid out before paying dividend on equity shares.

Cumulative Convertible Preference Shares: A type of preference shares where the dividend payable on the same accumulates, if not paid. After a specified date, these shares will be converted into equity capital of the company.

Why should one invest in equities in particular?

When you buy a share of a company you become a shareholder in that
company. Shares are also known as Equities. Equities have the potential to increase in value over time. It also provides your portfolio with the growth necessary to reach your long term investment goals. Research studies have proved that the equities have outperformed most other forms of investments in the long term. This may be illustrated with the help of following examples:

Over a 15 year period between 1990 to 2005, Nifty has given an annualised return of 17%.
Mr. Rajan invests in Nifty on January 1, 2000 (index value 1592.90). The Nifty value as of end December 2005 was 2836.55.   Holding this investment over this period Jan 2000 to Dec 2005 he gets a return of
78.07%. Investment in shares of ONGC Ltd for the same period gave a return of 465.86%, SBI 301.17% and Reliance 281.42%.

Therefore,
§ Equities are considered the most challenging and the rewarding,
when compared to other investment options.
§Research studies have proved that investme nts in some shares with a longer tenure of investment have yielded far superior returns than any other investment.

However, this does not mean all equity investments would guarantee similarhigh returns. Equities are high risk investments. One needs to study them carefully before investing.

What has been the average return on Equities in India?

Since 1990 till date, Indian stock market has returned about 17% to
investors on an average in terms of increase in share prices or capital
appreciation annually. Besides that on average stocks have paid 1.5%
dividend annually.Dividend is a percentage of the face value of a share that
a company returns to its shareholders from its annual profits. Compared to

How can one acquire equity shares?

You may subscribe to issues made by corporates in the primary market. In the primary market, resources are mobilised by the corporates through fresh public issues (IPOs) or through private placements. Alternately, you may purchase shares from the secondary market. To buy and sell securities you should approach a SEBI registered trading member (broker) of a recognized stock exchange.

most other forms of investments, investing in equity shares offers the highest rate of return, if invested over a longer duration.

Which are the factors that influence the price of a stock?

Broadly there are two factors: (1) stock specific and (2) market specific. The stock-specific factor is related to people’s expectations about the company, its future earnings capacity, financial health and management, level of technology and marketing skills.

The market specific factor is influenced by the investor’s sentiment towards the stock market as a whole. This factor depends on the environment rather than the performance of any particular company. Events favourable to an economy, political or regulatory environment like high economic growth, friendly budget, stable government etc. can fuel euphoria in the investors, resulting in a boom in the market. On the other hand, unfavourable events like war, economic crisis, communal riots, minority government etc. depress the market irrespective of certain companies performing well. However, the effect of market-specific factor is generally short-term. Despite ups and downs, price of a stock in the long run gets stabilized based on the stock- specific factors. Therefore, a prudent advice to all investors is to analyse and invest and not speculate in shares.

What is a Portfolio?

A Portfolio is a combination of different investment assets mixed and matched for the purpose of achieving an investor's goal(s). Items that are considered a part of your portfolio can include any asset you own-from shares, debentures, bonds, mutual fund units to items such as gold, art and even real estate etc. However, for most investors a portfolio has come to signify an investment in financial instruments like shares, debentures, fixed deposits, mutual fund units.

What is Diversification?

It is a risk management technique that mixes a wide variety of investments within a portfolio. It is designed to minimize the impact of any one security on overall portfolio performance. Diversification is possibly the best way to reduce the risk in a portfolio.

What are the advantages of having a diversified portfolio?

A good investment portfolio is a mix of a wide range of asset class. Different securities perform differently at any point in time, so with a mix of asset types, your entire portfolio does not suffer the impact of a decline of any one security. When your stocks go down, you may still have the stability of the bonds in your portfolio. There have been all sorts of academic studies and formulas that demonstrate why diversification is important, but it's really just the simple practice of "not putting all your eggs in one basket." If you spread your investments across various types of assets and markets, you'll reduce the risk of your entire portfolio getting affected by the adverse returns of any single asset class.