Module 4- Secondary Market
Meaning of 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.
• Definition of Secondary Market:
According to Pyle, “security exchanges are marketplaces where securities that have been
listed thereon may be bought and sold for either investment or speculation.”
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According to the Securities Contracts (Regulation) Act 1956, “Stock exchange means
anybody of individuals, whether incorporated or not, constituted for the purpose of
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assisting, regulating or controlling the business of buying, selling or dealing in securities.
Structure of Secondary Market:
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The secondary market consists of a three-level structure, following is discussed below:
1. National Stock Exchange (NSE).
2. Regional Stock Exchanges.
3. Over the Counter Exchange of India (OTCEI).
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1. National Stock Exchange (NSE): The NSE was set up in 1994. It was the first
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modern stock exchange to bring in new technology, new trading practise, new institution
and new products. In all, there are 23 exchanges in India – 19 regional stock exchanges,
BSE, NSE, OTCEI and the Interconnected Stock Exchange of India (ISE).
2. Regional Stock Exchanges: The regional stock exchanges are managed by a
governing body consisting of elected and nominated members. The trading members, who
provide working services, own, control and manage the exchanges. The governing body
has wide ranging powers to elect office bearers, set up committees, admit and expel
members, manage properties and finances of the exchange, resolve disputes and conduct
dayto-day affairs of the exchange.
3. Over the Counter Exchange of India (OTCEI): The OTCEI was set up in 1992
as a stock exchange providing small and medium sized companies the meant generate
capital. The Over-The-Counter Exchange of India (OTCEI) was an electronic stock
exchange based in Mumbai, India, aimed at small and medium-sized firms to access
capital markets, including electronic exchanges in the U.S. like NASDAQ. It operated
without a central place of exchange, with all trading occurring through electronic
networks. Established in 1990, the OTCEI was recognized by India’s Securities Contract
Regulation Act, allowing listed stocks to benefit equally as those on other exchanges in
India. However, the OTCEI has been de-recognized by SEBI since March 31, 2015, and is
no longer a functional exchange.
Features of the Secondary Market
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● Liquidity
The secondary market enables investors to easily buy and sell securities
post-issuance, allowing their investments to be converted into cash
promptly—boosting investor confidence and promoting active market participation.
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● Price Discovery
Here, the "true value" of securities emerges through real-time interactions of
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supply and demand. Prices constantly adjust in response to new information,
investor sentiment, and economic or political developments, aligning market
valuation with underlying fundamentals.
● Transparency and Regulation
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These markets function under rigorous regulatory oversight (e.g., SEBI in India),
enforcing disclosure norms, fairness, and fraud prevention—attracting both
domestic and international investors.
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● Standardization of Contracts
Organized secondary markets (like stock exchanges and derivatives exchanges)
utilize standardized contracts—covering lot size, settlement dates, margins,
etc.—which simplifies trading, reduces legal ambiguity, and improves
predictability.
● Risk Transfer and Hedging
Investors can transfer or mitigate risk by trading securities, including
derivatives—using these instruments to hedge against price fluctuations, interest
rate changes, currency risks, and more.
● Market Depth and Breadth
A well-developed secondary market offers diverse securities and ample buy/sell
orders at multiple price levels. This helps absorb large trades without destabilizing
prices, reduces volatility, and attracts institutional and international investors.
● Continuous Availability of Information
Investors have ongoing access to up-to-date data—on prices, volumes, corporate
announcements, and market news—enabling informed decisions and reducing
information asymmetry. Regulators also rely on this transparency to monitor unfair
practices.
● Facilitates Capital Formation (Indirectly)
Though the secondary market does not directly raise fresh funds, its liquidity and
efficient trading environment make primary offerings more attractive—supporting
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smoother capital raising in the primary market.
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Functions of the Secondary Market
Liquidity and Marketability: It provides a platform for buying and
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selling existing securities, thus offering liquidity and marketability to
previously issued financial instruments.
• Price Discovery: The secondary market aids in determining the fair
price of a security based on supply and demand factors.
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• Safety and Regulation: SEBI (Securities and Exchange Board of
India) regulates the market to protect investor interests and ensure a safe
investment environment.
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• Investor Access: It offers a place for the general investor to trade
securities efficiently and access investment opportunities.
• Verification of Company Value: Secondary markets or stock exchange
houses verify a company’s value before including them in their trade list, thus
ensuring that investors are buying from a trustworthy source.
• Trading Platform: Stock exchange houses provide a platform for
investors to trade securities, such as equity shares, bonds, preference shares,
treasury bills, debentures, etc., without involvement of the issuing companies.
• Active Trading: Transactions can be done anytime, and the market
allows for active trading for immediate purchase or selling with little variation
in price among different transactions.
• Valuation Data: Using the secondary market valuation data, investors
can get an idea about how much they have invested in securities
Types of Secondary Markets
● Stock Exchanges are formal, regulated marketplaces where a variety of securities like
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shares, bonds, and debentures are bought and sold. Prominent examples in India are
the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). These
platforms are vital for ensuring transparency, liquidity, and standardized trading
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procedures, which makes trading easier for investors. They provide real-time price
discovery, protect investor interests, and ensure a smooth transfer of ownership. This
role is essential for the healthy operation of capital markets and for building investor
confidence.
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● Over-the-Counter (OTC) Markets are informal secondary markets where parties
trade securities directly, especially those not listed on formal exchanges. Transactions
typically happen through dealers or brokers and can involve specialized contracts or
securities like unlisted shares, government securities, or corporate bonds. While OTC
markets offer flexibility, personalized pricing, and access to niche investments, they
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also carry higher counterparty risks and are subject to less regulatory oversight than
stock exchanges. As a result, participants must exercise careful due diligence.
● Bond Markets are a specialized part of the secondary market where debt instruments
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such as government bonds, corporate bonds, and municipal bonds are traded after
they are first issued. These markets enable investors to manage portfolio risk, adjust
their bond holdings, and capitalize on interest rate changes. They provide crucial
liquidity, helping institutions like banks, mutual funds, and insurance companies
optimize their portfolios. Well-developed bond markets can improve a country's
financial stability by enhancing capital mobility and lowering borrowing costs.
● Derivative Markets are for trading financial instruments like futures, options,
swaps, and forwards. The value of these instruments is derived from underlying assets
like stocks, commodities, currencies, or indices. These markets allow investors to
hedge against risks, speculate on price movements, or enhance portfolio performance.
Derivatives are traded on exchanges or OTC platforms, following standardized
contracts, margin requirements, and settlement procedures. They play a key role in
boosting market efficiency, providing price signals, and managing systemic risks
throughout the financial system.
● Foreign Exchange (Forex) Markets are global secondary markets where currencies
are traded against each other. As the world's largest and most liquid financial market,
it operates 24/7 with high liquidity and fast execution. Participants range from banks
and corporations to governments and individual traders. Forex markets are crucial for
international trade, investment, and remittances by providing a way to convert
currencies and determine exchange rates. Trading happens on both regulated exchanges
and OTC platforms.
● The Corporate Debt Segment of the debt market is where corporate bonds,
debentures, and other debt securities are traded after they are initially issued. This
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segment allows investors to adjust their exposure to corporate credit risk, interest rate
changes, or market conditions. For institutional investors, it offers portfolio
diversification, steady income, and long-term capital gains. For companies, it
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provides secondary liquidity, which makes debt instruments more attractive to initial
investors. Strong corporate debt markets foster financial intermediation and reduce
reliance on bank funding.
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● The Government Securities (G-Sec) Market is where sovereign debt instruments
like treasury bills, dated securities, and state development loans are traded. This
secondary market helps banks, insurance companies, pension funds, and foreign
investors manage sovereign credit exposure, meet regulatory requirements, or adjust
interest rate risk. G-Sec markets are characterized by high liquidity, low credit risk,
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and reliable benchmark yields, which makes them central to monetary policy and
public debt management. A robust G-Sec market strengthens fiscal discipline and
enhances investor confidence.
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● Commodity Markets are secondary markets where raw materials like gold, silver,
crude oil, and agricultural products are traded. These markets operate through
commodity exchanges or OTC platforms and offer both spot and derivative contracts.
They help producers, consumers, and investors manage risk from price volatility,
discover fair prices, and handle supply chain risks. By enabling efficient resource
allocation, commodity markets are a significant contributor to global trade and
economic stability.
● Money Markets are short-term debt markets for trading instruments such as treasury
bills, certificates of deposit, and commercial papers. These markets help institutions
manage their short-term liquidity and allow investors to earn returns on surplus funds.
They offer low-risk, highly liquid investments suitable for banks, corporations, and
mutual funds. Trading usually occurs OTC or through negotiated deals. A
well-functioning money market is essential for supporting monetary policy, financial
stability, and short-term funding operations.
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Functions of the Stock Market
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● Capital Formation
The primary market is facilitated by the stock market, where companies raise
capital by issuing new securities, such as stocks and bonds. This process allows
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businesses to fund expansion, research, and other capital-intensive activities.
● Secondary Market Trading
Liquidity Provision: The secondary market provides a platform for investors to
buy and sell existing securities, enhancing liquidity. Investors can easily convert
their investments into cash, and this liquidity contributes to market efficiency.
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● Economic Indicator
The stock market's performance is often considered a barometer of economic
health. Bullish markets are associated with economic optimism, while bearish
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markets may reflect concerns about economic conditions.
● Market Efficiency
The stock market allocates resources efficiently by directing capital to companies
with the most promising growth prospects. Efficient market mechanisms
contribute to the optimal allocation of resources within the economy.
● Facilitation of Mergers and Acquisitions
The stock market plays a role in corporate restructuring by facilitating mergers
and acquisitions. Companies can use their shares for acquisitions, enabling
strategic growth and consolidation.
Role of Secondary Market
● Maintaining the Fair Price of Shares
The secondary market is a market of already issued securities after the initial
public offering (IPO). Capital markets run on the basis of supply and demand of
shares. Secondary markets maintain the fair price of shares depending on the
balance of demand and supply. As no single agent can influence the share price,
the secondary markets help keep the fair prices of securities intact.
● Facilitating Capital Allocation
Secondary markets facilitate capital allocation by price signaling for the primary
market. By signaling the prices of shares yet to be released in the secondary
market, the secondary markets help in allocating shares.
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● Offering Liquidity and Marketability
Second-hand shares are of no use if they cannot be sold and bought for liquid
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cash whenever needed. The shareholders usually use the share markets as the
place where there is enough liquidity and marketability of shares. That means that
the secondary markets play the role of a third party in the exchange of shares.
Without a secondary market, the buyers and sellers would be left with a
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self-exchange in one-to-one mode that is not quite effective till now. Therefore,
the secondary market is a facilitating body of liquidity and marketability for the
shareholders.
● Market Indicators
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The performance of stock indices, such as the Nifty 50 and the Sensex in India,
serves as indicator of the overall health and sentiment of the financial markets
and the economy at large.
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● Corporate Governance
Stock markets impose certain listing requirements on companies, promoting
transparency and adherence to corporate governance standards. Companies with
publicly traded shares are often subject to higher scrutiny, enhancing investor
confidence.
● Dividend Distribution
Companies listed on stock exchanges can distribute dividends to their
shareholders, providing a return on investment. Dividends are a key factor
influencing investment decisions and shareholder wealth.
● Risk Mitigation
Investors can manage risk through diversification, buying and selling securities,
and utilizing various financial instruments available in the stock market, such as
options and futures.
● Price Discovery
Market Valuation: The stock market plays a crucial role in determining the fair
market value of securities through the continuous buying and selling of shares.
This price discovery process reflects investor perceptions of a company's
performance and future prospects.
● Facilitation of Investment
The stock market encourages savings and investment by providing individuals
and institutions with opportunities to invest in a diversified portfolio of securities.
This helps channel funds from savers to productive enterprises.
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● Ownership Transfer
Investors can easily buy and sell securities, allowing for the transfer of ownership
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in a transparent and regulated manner. This facilitates the transfer of funds
between investors and supports portfolio diversification.
● Borrowing and Lending
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The stock market serves as a platform for companies to raise funds by issuing
bonds. Investors who purchase these bonds essentially lend money to the issuing
companies, creating an additional avenue for corporate financing
● Query successful
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Functions of the Stock Market
● Capital Formation
Primary Market: The stock market facilitates the primary market, where
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companies raise capital by issuing new securities, such as stocks and bonds. This
process allows businesses to fund expansion, research, and other capital-intensive
activities.
● Secondary Market Trading
Liquidity Provision: The secondary market provides a platform for investors to
buy and sell existing securities, enhancing liquidity. Investors can easily convert
their investments into cash, and this liquidity contributes to market efficiency.
● Price Discovery
Market Valuation: The stock market plays a crucial role in determining the fair
market value of securities through the continuous buying and selling of shares.
This price discovery process reflects investor perceptions of a company's
performance and future prospects.
● Corporate Governance
Stock markets impose certain listing requirements on companies, promoting
transparency and adherence to corporate governance standards. Companies with
publicly traded shares are often subject to higher scrutiny, enhancing investor
confidence.
● Dividend Distribution
Companies listed on stock exchanges can distribute dividends to their
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shareholders, providing a return on investment. Dividends are a key factor
influencing investment decisions and shareholder wealth.
● Risk Mitigation
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Investors can manage risk through diversification, buying and selling securities,
and utilizing various financial instruments available in the stock market, such as
options and futures.
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● Economic Indicator
The stock market's performance is often considered a barometer of economic
health. Bullish markets are associated with economic optimism, while bearish
markets may reflect concerns about economic conditions.
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● Market Efficiency
The stock market allocates resources efficiently by directing capital to companies
with the most promising growth prospects. Efficient market mechanisms
contribute to the optimal allocation of resources within the economy.
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● Facilitation of Mergers and Acquisitions
The stock market plays a role in corporate restructuring by facilitating mergers
and acquisitions. Companies can use their shares for acquisitions, enabling
strategic growth and consolidation.
● Facilitation of Investment
The stock market encourages savings and investment by providing individuals
and institutions with opportunities to invest in a diversified portfolio of securities.
This helps channel funds from savers to productive enterprises.
● Ownership Transfer
Investors can easily buy and sell securities, allowing for the transfer of ownership
in a transparent and regulated manner. This facilitates the transfer of funds
between investors and supports portfolio diversification.
● Borrowing and Lending
The stock market serves as a platform for companies to raise funds by issuing
bonds. Investors who purchase these bonds essentially lend money to the issuing
companies, creating an additional avenue for corporate financing.
● Market Indicators
The performance of stock indices, such as the Nifty 50 and the Sensex in India,
serves as an indicator of the overall health and sentiment of the financial markets
and the economy at large.
Structure of the Stock Market
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The stock market in India has a well-defined structure, comprising various entities and
mechanisms that facilitate the buying and selling of securities. The structure
encompasses both primary and secondary markets, each serving distinct functions in the
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capital market ecosystem.
1. Primary Market The primary market is where new securities are issued and initially
offered to the public. It consists of the following elements:
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● Issuer: The company or entity that issues new securities to raise capital. This can
include initial public offerings (IPOs) and additional offerings.
● Underwriter: Investment banks or financial institutions that facilitate the
issuance by committing to purchase the entire issue and then selling it to the
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public.
● Registrar and Transfer Agent (RTA): Entities responsible for maintaining
records of shareholders and processing share transfers.
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2. Secondary Market The secondary market is where existing securities are traded
among investors. The primary components include:
● Stock Exchanges: Platforms where buyers and sellers come together to trade
securities. In India, the two primary stock exchanges are the Bombay Stock
Exchange (BSE) and the National Stock Exchange (NSE). They regulate and
oversee the trading activities and ensure market integrity.
● Brokers and Sub-Brokers: Intermediaries authorized to facilitate securities
transactions on behalf of investors. They act as a link between investors and the
stock exchanges.
● Depositories: Entities that hold and maintain securities in electronic form. In
India, the two central depositories are the National Securities Depository Limited
(NSDL) and the Central Depository Services Limited (CDSL). They facilitate the
electronic transfer of securities.
● Clearing Corporation: Entities that handle the clearing and settlement of trades,
ensuring the smooth and secure transfer of securities and funds between buyers
and sellers. In India, the National Securities Clearing Corporation Limited
(NSCCL) and the Clearing Corporation of India Limited (CCIL) play crucial
roles.
● Custodians: Institutions responsible for safeguarding and holding securities on
behalf of investors. They provide custodial services to institutional investors,
foreign institutional investors (FIIs), and high-net-worth individuals.
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3. Brokers and Sub-Brokers
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● Brokers: Facilitate securities transactions between buyers and sellers. They may
be full-service brokers providing a range of services or discount brokers offering
lower-cost trading.
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● Sub-Brokers: Individuals or entities affiliated with brokers, authorized to
facilitate trades on their behalf.
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4. Market Intermediaries
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● Merchant Bankers: Facilitate the issuance of new securities in the primary
market and provide financial advisory services.
● Underwriters: Guarantee the sale of newly issued securities, ensuring that the
issuing company receives the intended capital.
5. Depositories
● National Securities Depository Limited (NSDL): A central securities
depository in India, holding securities in electronic form.
● Central Depository Services Limited (CDSL): Another central depository
facilitating the electronic holding and transfer of securities.
8. Technology Infrastructure The stock market relies on advanced technological
infrastructure to facilitate trading, clearing, and settlement processes. Electronic trading
platforms, data dissemination systems, and secure networks contribute to the efficiency
of market operations.
Players in the Stock Market
The stock market involves various players, each playing a distinct role in the buying,
selling, and overall functioning of the financial markets. These participants contribute to
the liquidity, transparency, and efficiency of the stock market.
1. Investors
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● Retail Investors: Individual investors who buy and sell securities for personal
investment. They include small-scale investors, often trading through brokerage
accounts.
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● Institutional Investors: Large entities like mutual funds, pension funds,
insurance companies, and hedge funds that invest on behalf of a group of
individuals or their members.
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2. Stock Exchanges
● Bombay Stock Exchange (BSE): One of the major stock exchanges in India.
● National Stock Exchange (NSE): Another significant stock exchange, known
for electronic trading and market transparency.
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9. Research Analysts and Advisory Firms: Professionals and firms providing research,
analysis, and investment advice to investors. They play a role in guiding investment
decisions.
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10. Credit Rating Agencies: Entities that assess the creditworthiness of issuers and
their securities, providing credit ratings to assist investors in evaluating risk.
11. Custodians: Financial institutions responsible for the safekeeping of securities on
behalf of investors, particularly institutional investors.
12. Government The government, through various agencies, can influence the stock
market through fiscal and monetary policies, regulations, and initiatives.
13. Media Financial news outlets and media play a role in disseminating information
about market trends, company performance, and economic developments, influencing
investor sentiment.
14. Arbitrageurs and Speculators: Individuals or entities engaging in arbitrage
(exploiting price differences) and speculation (betting on future price movements) to
profit from market inefficiencies.
15. Technology Providers: Companies providing technology infrastructure, trading
platforms, and data services essential for the operation of electronic trading in the
modern stock market.
Stock Exchange
A stock exchange is a platform where securities such as shares, bonds, and other
financial instruments are bought and sold by investors in a systematic way.
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Bombay Stock Exchange (B.S.E)
Introduction to Bombay Stock Exchange:
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BSE is the oldest stock exchange in Asia, established in 1875 as “The Native Share &
Stock Brokers’ Association.” It shifted from the open outcry system to an online
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screen-based trading system called BOLT in 1995. Earlier an Association of Persons
(AOP), BSE is now a corporatized and demutualised entity under the Companies Act,
1956, following SEBI’s corporatisation and demutualisation scheme of 2005. Sensex, an
index of 30 large companies, represents the BSE.
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Functions of Bombay Stock Exchange:
1. Price Determination
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2. Contributes to the Economy
3. Facilitates Liquidity
4. Transactional Safety
5. Liquidity and Investment Opportunities
6. Economic Indicator
7. Financial Inclusion
National Stock Exchange (N.S.E)
What is NIFTY?
NIFTY is a market index launched by the NSE in 1994 to represent the top 50 largest
and most liquid stocks. It stands for National Stock Exchange Fifty and reflects overall
market performance. It is one of the most followed equity indices in India alongside
Sensex and Bank Nifty.
Functions of National Stock Exchange:
1. Equal opportunity to all investors for trading.
2. Transparent, fair, and efficient market.
3. Shorter settlement periods and electronic settlements.
4. International-standard operations.
5. Nationwide trading facility for equities, debt, and hybrid instruments.
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Over The Counter Exchange of India (OTCEI)
Introduction:
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OTCEI, established in 1990 and operational since 1992, is a fully computerised,
transparent, and single-window exchange designed to help small and medium companies
access capital markets at lower costs. Trading is not tied to a specific location and
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happens through OTCEI counters.
Objectives of OTCEI:
● Provide capital market access for small and medium-sized companies.
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● Offer investors a transparent and cost-effective avenue of investment.
Functions of OTCEI:
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1. Provide liquidity at fair and fixed prices.
2. Easy and cheaper public issue mechanism.
3. Liquidity for securities of small companies.
4. Simple buying and selling process.
5. Platform for smaller, less liquid companies.
6. Lower cost of issuing securities.
Listing of Securities
Meaning of Listing:
Listing means registering a company’s securities on a stock exchange so they can be
traded. Listing is not compulsory unless a public company issues securities to the public.
Objectives of Listing:
1. Ensure marketability and liquidity of securities.
2. Provide free negotiability to stocks.
3. Protect investors’ interests.
4. Mechanism for effective supervision and control.
Listing Requirements:
1. Listing must be permitted by the Memorandum and Articles of Association.
2. At least 49% of share capital should be issued to the public.
3. Prospectus with necessary information must be issued.
4. Fair and reasonable allotment of shares.
5. Signing of a listing agreement with the exchange.
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Trading Procedure on a Stock Exchange
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4.a. Selection of Broker
Opening a Demat Account
Placing the Order
Finding Best Price
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5. Executing Order
6. Issuance of Contract Note
7. Making Payment / Delivering Shares (Pay-in Day)
8. Settlement Cycle (T+2 Days)
9. Delivery of Shares in Demat Form
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Problems of the Indian Stock Market
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1. Lack of Professionalism among brokers
2. Domination of Financial Institutions like LIC, UTI, GIC
3. Domination by Big Operators (e.g., Harshad Mehta scam)
4. Less Floating Stocks (scarcity of tradable shares)
5. Speculative Trading (90% speculative, 10% genuine investment)
6. Preference for traditional investment over the stock market
7. Lack of awareness and education about stocks
8. Technical glitches in the trading infrastructure
SEBI Guidelines for Public Issue of Shares
1. Prospectus must be attached.
2. The prospectus should highlight risk factors.
3. Objective and project cost must be stated.
4. The company’s management, history, and business must be disclosed.
5. Premium justification must be given.
6. Subscription list: minimum 3 days, maximum 10 working days.
7. No collection of application money in cash by agents.
8. The compliance report must be submitted to SEBI within 45 days of closure.
9. Minimum application: 500 shares of face value Rs.100.
10.Minimum subscription of 90% required, else refund within 120 days.
11.Capital issue should be fully paid up within 120 days.
12.Underwriting is mandatory.
13.Listing limit increased from Rs.3 crore to Rs.5 crore.
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