secondary market

Secondary Market

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SECONDARY MARKET

• Market in which securities already issued by companies are subsequently traded among investors.

• Continuous trading.• The secondary market is that market in which the

buying and selling of the previously issued securities is done.

• The transactions of the secondary market are generally done through the medium of stock exchange.

• The chief purpose of the secondary market is to create liquidity in securities.


• Under Securities Contract Regulation Act 1956, securities trading is regulated by Central Government;

• Takes place only in stock exchanges recognized.

• SEBI, Company Law Board and stock exchanges regulate secondary market.


Primary Vs Secondary Market

• Organisation

• Period

• Capital Contribution

• Ownership

• Liquidity

• Seller


STOCK EXCHANGE

• Market where securities of joint stock companies and govt, or semi-govt bodies are dealt in.

• Securities Contracts (Regulation) Act 1956

• Any body of individuals, whether incorporated or not constituted for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities.


STOCK EXCHANGE

• First stock exchange in India- The Native Stock and Share Brokers Association (Bombay 1875)

• Ahmedabad 1894.

• SCRA 1956.

• G.S Patel Committee 1985

• L C Gupta Committee 1991

• Pherwani Committee 1991

• G S Patel committee 1995

• Varma Committee 1997

• Self regulatory role of Stock exchanges


THE ROLE OF STOCK EXCHANGES

• Raising capital for business.

• Mobilizing savings for investment.

• Facilitating companies growth.

• Profit sharing.

• Creating investment opportunities for small investors.

• Government capital- raising for development projects.

• Barometer of the economy.www.kanishgeorge.blogspot.in

Functions

• Liquidity and Marketability

• Helps in capital Formation

• Fixation of Prices

• Safety of Funds

• Supply of Long Term Funds

• Motivation for improved performance

• Motivation for investment

• Reflects the general state of economy


Listing of Securities

• Enrolment of name in the official trading list maintained in the stock exchange.

• SCRA rules, SEBI guidelines and rules and regulations of exchange prescribe the statutory requirements to be fulfilled by company for getting its shares listed.

• Sec 73(1) of Companies Act: should make an application to one or more recognised stock exchange for listing its securities within the prescribed time.

• After scrutiny of listing application, a listing agreement would be executed.


Objectives of Listing

• Provide ready marketability

• Provide liquidity and transferability

• Ensure proper supervision and control of dealings

• Protect the interest of shares.


Listing Obligations

• Annual Listing Fee

– Prescribed initial listing fee and annual listing fee on or before April 30 each year.

• Regulations of Stock Exchange

– Agrees to comply with rules, byelaws and regulations now and hereafter.

• Notice of Board Meetings

– Prior intimation at least seven days in advance.

• Book closure notice

– 42 days advance notice, specifying the purpose.


• Submission of reports

– Annual reports, B/S, P&L, and all periodical and special reports

– All notices, resolutions, and circulars relating to new issue

– Notices and call letters of all meetings.

– Proceedings of annual/general body meeting.

– Copies of all notices, circulars etc issued or advertised in the press.

• Publication of periodical interim statements

– In a form approved by exchange.

• Issue of shares

– Offer shares, securities, rights, benefits to subscribe pro rat a basis to equity share holders, unless approved in General meeting, 4 weeks time.


• Effecting changes in securities

– 21 days prior notice necessary to make changes and make application to stock exchange

• Circulation of Annual results

– Supply a copy of B/S, P&L and directors report to each share holder and up on application to any member of the exchange

• Information of events

– Inform about strikes, lockouts both at occurrence and cessation


• Take over conditions

– Take over regulations of SEBI should be fulfilled.

• Unaudited financial results

– Will be published within one month from the end of a quarter to the stock exchange

• Corporate governance

– Include separate section on corporate governance in annual reports


Advantages of Listing

• Provides liquidity to the securities of the company.

• Help investors to evaluate the company through periodic reports.

• Ensures free transferability of shares.

• Exceptions and concessions available to a widely held companies are available to listed companies.

• Transactions appear in news papers, provide information regarding market value of investments.


• Prices determined by demand and supply, ensures fair prices.

• By compulsory disclosure, the investing public get valuable information.

• Improves public image and reputation.

• Facilitates to mobilize more funds from public.

• Listed securities are treated as collateral securities for loans and advances.


Disadvantages of Listing

• Regulatory measures of the stock exchanges and SEBI.

• Sending notices of annual meeting, annual reports to a large number of shareholders will raise cost to the company.

• Submitted periodical reports and vital information might be used by competitors.

• Public offer itself is expensive.

• Listing does not guarantee price quotations.


Minimum Requirements/ Qualifications for Listing

• Minimum Issued capital– Ministry of finance & Department of

economic affairs: Minimum issued capital 3 crores and minimum public issue 75 Lakhs. BSE 10 crore

• Payment of excess application money– Allotment should be done within 30 days of

closure of public issue. 15% p.a interest rate applicable for further period.

• Listing on multiple exchanges– Paid up capital of the company above R 5

crores.


• The number of shareholders

– For every 1 lakh of fresh capital- at least 10 shareholders

– For sale of existing capital; 20 shareholders.

• Appointment of a market maker

– Paid up capital between ₹ 3 cr and ₹5 cr, to provide two way quotations for a minimum period of 18 months.

• Articles of Association

– If veto power to director to overrule majority decision, not qualified.


• Advertisement

– Issue over subscribed/ Thanks to the investing public for their overwhelming response

• Minimum Subscription

– Rs 5000 (500xRs.10) SEBI; reduced to Rs.2000. Should be given in Prospectus.

• Applying Mode

– Single name or joint name of not more than three. Can be made by Limited companies, corporations, or institutions not by trust or partnership.


• Cost of Public Issue

– Ceiling in the expenditure prescribed by SEBI

• Public Offer Size

– Size and value should be stated in prospectus. Whether at premium, preferential allotment etc should also be stated.


Listing Procedure

• Preliminary discussion

• Articles of association Approval

• Draft prospectus Approval


Delisting

• Voluntary delisting – Listing fee is prohibitive.– Business sick/ Suspended/ closed.– Capital base is small.– Mergers, amalgamations and takeovers.

• Conditions to be fulfilled:– Company must have incurred losses in the

preceding three years, with net worth less than the paid up capital.

– Securities have been infrequently traded.– Securities remain listed at least on the

regional stock exchange.


• Compulsory Delisting

– Failed to comply with requirements of listing agreement.

– Fails to redress the grievances of investors.

– Unfair trade practices of promoters or managers and malpractices such as issuing of fake shares by management.

– Thin / negligible shareholding base.

– Trading in securities of the company has been suspended for more than six months.


Trading System

• Floor Trading

– Trading took place through an open outcry system on the trading floor or ring of the exchange during official trading hours.

– Buyers and sellers transact business with broker.

– Brokers transact on behalf of investors.


• Screen based Trading

– Fully automated computer mode of trading.

– Distant participants can trade with each other.

– Greater transparency

– Quick trading

– Proper matching of orders to buy and sell

– Easy and paperless trading through demataccounts


Quote driven system

• Market maker inputs two way quotes into the system

– Bid price

– Offer price

• Participants place orders based on bid-offer quotes.

• These are automatically matched by the system according to certain rules.


Order driven system

• Clients place their buy and sell orders with the brokers.

• Orders feed in to the system.

• The buy and sell orders are automatically matched by the system according to predetermined rules.


Types of Orders

• Market Orders

– Broker is instructed by investor to buy or sell a stated number of shares immediately at the best prevailing price in the market.

– Buy order- lowest price obtainable

– Sell order- highest price obtainable

– Investor will be certain about execution; uncertain about price.


• Limit Orders

– Investor specifies the limit price.

– Limit buy order- maximum price that he will pay for the share; order executed at limit price or lower price.

– Limit sell order- minimum price he will accept for shares; order executed at limited price or higher price.

– Limit prices are away from the market price


• Stop orders (Stop loss order)

– To protect a profit or limit a loss.

– In sell order, stop price will be below the market price.

– Buy order, stop price will be above the market price.

– It is a conditional market order, it becomes a market order when the market price reaches or passes the stop price.


• Stop limit orders (Conditional limit order)

– The investor specifies two prices, a stop price and a limit price.

– When the market price reaches the stop price, the order becomes the limit order to be executed within the limit price.


• Day order

• Week order

• Month order

• Open orders ( GTC)

• Fill or Kill Orders (FoK)


Settlement

• Execution of orders

– Buy orders are matched with sell orders.

• Settlement of trade

– Delivery of security and payment of cash.

– Functioned by clearing house.

• Clearing house acts as counter party.

• “Account Period Settlement”

• “Compulsory Rolling Settlement”


• Trades executed on a particular day are settled after a specified number of business days.

• T + 5, T + 3, now T + 2.

• On the first business day (T+1) exchange generates delivery and receive orders for transactions done by member brokers along with a money statement.

• Can be downloaded by member brokers.


Dematerialisation

• Introduced in India through the enactment of

the Depositories Act, 1996

• It is not mandatory

• One may keep its holding partly in physical

form and partly in Demat form

• A selected list of securities announced by

SEBI can be delivered only in demat form in

the stock exchanges connected to NSDL


DEMAT

• The process of converting physical shares (share

certificates) into an electronic form.

• Shares once converted into dematerialised form

are held in a Demat account.

• Dematerialisation of share certificates are effected

through depositories.

• All physical certificates will be surrendered to the

issuer company that has issued the securities.

• Certificates are cancelled on the advice of the

Depositories.


Depository

• Depository is an organisation, which

holds the beneficial owner's securities in

electronic form, through a registered

Depository Participant (DP).

• A depository functions somewhat similar

to a commercial bank.

• To avail of the services offered by a

depository, the investor has to open an

account with it through a registered DP.


NATIONAL SECURITIES DEPOSITORY LIMITED (NSDL)

• Established in August 1996 - the first depository in India.

• Promoted by institutions of national importance.

• Responsible for economic development of the country

• Handles most of the securities held and settled in dematerialized form in the Indian capital market.

• NSDL has around 1,36,97,744 investors associated with it currently and has 15,936 service centers all over India


CENTRAL DEPOSITORY OF SERVICES LIMITED (CDSL)

• CDSL received the certificate of commencement of business from SEBI in February, 1999.

• All leading stock exchanges like the National Stock Exchange, Calcutta Stock Exchange, Delhi Stock Exchange, The Stock Exchange, Ahmedabad, etc. have established connectivity with CDSL.

• Currently around 94,33,059 investors and 8317 companies have admitted their securities (equities, bonds, debentures, commercial papers), units of mutual funds, certificate of deposits etc. into the CDSL system.

• CDSL has around 571 Depository Participants (DPs) in 11,422different locations all over India.


Depository Participant

A Depository Participant (DP) is an agent of the

depository who is authorised to offer

depository services to investors.

Financial institutions, banks, custodians and

stockbrokers complying with the requirements

prescribed by SEBI/ Depositories can be

registered as DP.


Functions of Depository participants

• Account opening and its administration• Dematerialisation• Rematerialisation• Clearing and settlement of trade• Daily report generation of beneficiary accounts• Daily reconciliation • Grievance handling• Facilitating pledging of securities• Help in allotment in IPO• Provide information and assistance to demat

holders.


Investors [Beneficial Owner]

Individual

Partnership Firm

HUF

Company

“Beneficial Owner” is a person in whose name a demat account is opened with Depository for the purpose of holding securities in the electronic form


Investors Vs Speculators

• Risk

• Time period

• Return

• Nature of Income

• Frequency of Transactions

• Decision making

• Source of funds


SPECULATION

• Making quick short term profit from the fluctuations of prices of securities in the stock market.

• Speculator

• Exploiting misprice.


Long Buy

• Feels that security is under priced/ is likely to show a rising trend, speculator buy security for selling it at a higher price.

• He is in a Long Position.

• Sell as quickly as possible.


Short Sale

• Feels that security is overpriced, and price is likely to decline shortly, sell the security a the current price, and buy it, some times later when the price declines.

• Speculator sell security which he does not own.

• Taking a Short Position

• Short Sale- sale of a security that is not owned by the seller.

• If price moves up, will suffer loss.


Types of Speculators

• Bull

• Bear

• Lame Duck

• Stag


Bull

• expects the future raise in price of securities

• Takes long position

• Engages in Long buy

• Bull Campaign

• Bullish phase


Bear

• Pessimist, expects a decline in the prices of securities.

• Takes a Short Position

• Engaging in short sales.

• Engage in Bear raid.

• Bearish Market.


Lame Duck

• A bear who made a short sale but unable to deliver the securities on a particular day as agreed upon , he struggles as a lame duck in fulfilling his commitment .

• This happens when the prices do not fall as expected by the bear and the other party is not willing to postpone the settlement to the next period.


Stag

• Premium hunter.

• Applies for shares in new issue market.

• Expects a rise in price as soon as shares are allotted.

• Sells the shares at higher price.

• Incur loss if price of new issue shares do not rise.


Margin Trading

• Borrowing money from Bank or the broker for purchasing securities.

• Cash paid by investor is known as margin.

• Pay interest on money borrowed.

• Risky.


secondary market

Education

native stock

medium of stock exchange

recognised stock exchange

securities trading

issued securities

listing of securitiesenrolment

listing agreement

regulations of exchange