Module-4

SECONDARY MARKET
Module No. 4: Primary Market (12 Hrs.)
Secondary Market Meaning, structure, functions, players in Stock Market, Merits and Demerits of stock
markets. Methods in Stock Markets - Recognition of stock exchanges — Function of stock exchanges of
BSE- NSE — OTCI —Listing of securities —Trading and Settlement Procedure in the Stock Market -
Problems of Indian Stock Market; SEBI: Objectives - functions—Role and Reforms in Secondary Market.

SECONDARY MARKET/STOCK MARKET

Meaning:
Stock market represents the secondary market where existing securities (shares and
debentures) are traded; stock exchange provides an organized mechanism for purchase and sale of
existing securities. Stock exchanges are organized and regulated markets for various securities
issued by corporate sector and other institutions.
Definition of stock exchange:
According to Pyle, “security exchanges are market places where securities that have been
listed thereon may be bought and sold for either investment or speculation.”
According to the Securities Contracts (Regulation) Act 1956, “Stock exchange means
anybody of individuals, whether incorporated or not, constituted for the purpose of assisting,
regulating or controlling the business of buying, selling or dealing in securities.”
According to this Act, securities include the following:
• Shares, scripts, stocks, bonds, debentures, stock or other marketable securities of any
incorporated company or corporate
• Government securities
• Right or interest securities

Role And Importance of Stock Exchange

• The stock exchange will play an important role in the success of the economy of the
country.
• The stock exchange is one of the basic financial tools for stimulating the economy by
attracting capital for investment in the projects.
• The stock exchange also helps to revive other sectors of the economy such as commerce,
industry and service.
• Shares, scrips, stocks, debentures stock and government securities are traded in stock
exchange.
• Stock exchanges provide appropriate advice to their clients.
• Stock exchange will list public private and foreign companies.
• Stock exchange wish to join the linkage system between the region’s stock exchanges and
at a later stage, with international stock exchanges.
• Stock exchange is providing a market that mobilises and distributes the nation’s savings
utilised for the best purpose of the country.
• Stock exchange is a market in which securities are bought and sold.
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Control over secondary market:
For the effective functioning of secondary market, proper control must be exercised. At
present, control is exercised through the following three important processes:
1) Recognition of Stock Exchange
2) Listing of Securities
3) Registration of brokers
1) Recognition of Stock Exchange:
Stock exchanges are the important ingredient of capital market. They are the citadel of
capital and fortress of finance. They are the theatres of trading in securities and as such they assist
and control the buying and selling of securities.
Recognition Procedure:
The stock exchange in India has to be recognized by the central govt. under Securities
Contracts Regulation Act (SCRA), 1956 and SEBI and they have to comply with the provisions
of the SCRA and SEBI and also the bye laws and regulations duly approved by the govt.
Any stock exchange which needs recognition under SEBI Act has to submit an application
in the prescribed manner to the central govt. This application must be accompanied by the
following documents:
i) A copy of the bye-laws of the stock exchange for its operation
ii) A copy of the rules relating to its constitution, governing body, powers and duties of the office
bearers, the admission procedure etc.
Grant of Recognition:
The following conditions must be fulfilled
i) The rules and bye - laws of the stock exchange applying for registration must ensure fair dealing
and protect the interest of investors
ii) The stock exchange concerned must be willing to comply with any other conditions that may
be imposed by the govt., from time to time
iii) The grant of recognition must be in the interest of trade as well as in the public interest.
Renewal of recognition
If any stock exchanges intend to renew its recognition, it must once again make an application to
the central govt., in the aforesaid manner three months before expiry of the period of recognition.
Withdrawal of Recognition
The central govt., may withdraw the recognition if the grant is against the interest of trade or public
interest.
Organisation Structure of stock exchange:
The organisation structure of stock exchanges is different from place to place.
Different forms are:
• Voluntary non-profit making association
• Public Limited Company limited by shares
• Company Limited by Guarantee -
In India there are 7 stock exchanges now, they are:
1. Bombay Stock Exchange (BSE)
2. National Stock Exchange of India Ltd. (NSE)
3. Calcutta Stock Exchange Ltd.
4. Metropolitan Stock Exchange of India Ltd.

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 5. Multi Commodity Exchange of India Ltd.
6. National Commodity & Derivatives Exchange Ltd.
7. Indian Commodity Exchange Limited
2) Listing of Securities
Listing of securities means admission of Securities for trading on a recognized stock
exchange. In the case of securities are not listed in the stock exchange such company securities are
not traded in the stock exchange. Listing is compulsory for a public issuing company that intends
to offer shares/debentures to the public for subscription. Listed securities are of two classes, viz.,
Cash List and Forward List. The securities on the cash list are those involving ready delivery
while securities in the forward list enjoy forward trading privileges.
Making stocks, bonds, or other financial instruments of a company available for trading on
an approved stock market is referred to as listed securities. To receive authorization from the
exchange, you must meet specific eligibility requirements and adhere to legal requirements. The
issuing company and investors gain a lot from listing securities.
Objectives Of Listing of Securities
• To provide liquidity to securities
• To provide a mechanism for effective control and supervision of trading
• To mobilize savings for economic development
• To provide free negotiability to stocks.
• Ability to raise further capital.
Advantages/Benefits of Listing
The benefits of listing securities on a stock market include the following:
1. Higher liquidity: When securities are listed on a stock market, investors can buy or sell
them more easily. The increased trading activity improves the assets’ liquidity, increasing
their allure to investors.
2. Heightened visibility: A company’s exposure and visibility to potential investors are
increased by listing on a stock market. This heightened awareness might draw in new
investors and present chances for the business to acquire more money.
3. Enhanced legitimacy: A company and its securities gain legitimacy and credibility by
being listed on a stock exchange. Investor confidence is bolstered by the stringent listing
standards and regulations connected with exchanges, which add to the company’s overall
credibility.
4. Access to capital: The opportunity to access new streams of finance is one of the
significant advantages of listing securities. Broader pools of possible investors, including
institutional investors, who are more inclined to invest in listed shares, become accessible
when a company is listed on a stock market. This enlarged investor base increases the
company’s prospects of obtaining funding for growth, R&D, or other strategic projects.
5. Improved Market Awareness and Brand Reputation: Listing on a stock exchange can
improve market acceptance and brand awareness for a company. Because a listing is public,
there is potential for more media interest and analyst focus. This increased visibility might
bring in new clients, collaborators, and business prospects, which will help the organization
expand and prosper as a whole.
6. Prospects for Expansion and Growth: Listing on a stock market might lead to prospects
for expansion and development. Mergers, acquisitions, and strategic alliances can be made
more accessible due to expanded access to finance, higher liquidity, and raised visibility.
A company’s shareholder base can grow as a result of being listed on a stock exchange

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 since it attracts institutional investors and analysts who actively look for investment
possibilities in listed companies.

Disadvantages of Listing
1. Manipulation of Value: Listed securities offers wide scope for the speculators to
manipulate the values in such a way as detrimental to the interest of the company
2. Fluctuation of value: Sometime listed securities are subject to wide fluctuations in their
value. The wide fluctuations in their values have the effect of degrading the company’s
reputation and images in the eyes of the public as well as the financial intermediaries
3. Disclosure of vital information: Listing discloses vital information such as operating
environment to competitors.
Trading In Securities:
The trading in securities is governed by the Rules and Bye laws of the Stock Exchange.
Meaning of Securities
According to the Securities Contracts (Regulation) Act 1956, Section 2(h) defines the key
word “Securities”. Securities includes shares, scrips, stocks, bonds, debentures, debenture
stock or other marketable securities of a like nature in or of any incorporated company or
other body corporate. Securities also cover government securities and rights or interests in
securities. But it does not include securities of private companies as they are not capable of being
dealt in on a stock exchange and are not marketable securities due to possible restrictions on
transfer. The major instruments in securities trading are debentures, public sector bonds and
government securities.
Issue of securities are as outlined below:
• Government Securities
• Corporate Securities
• Corporate Debentures
• Company Deposits
• Commercial Paper
• Fixed Deposits
• Equity Shares
• Preference Shares
• Bonds

3. Registration of Stock Brokers

Stock Broker:
• An agent that charges a fee or commission for executing buy and sell orders submitted by
an investor.
• The firm that acts as an agent for a customer, charging the customer a commission for its
service.
• A stock broker is someone who performs transactions on the stock market on behalf of third
parties who are unable or unwilling to trade themselves
• Stock broker who is a member of the stock exchange to deal securities on recognised stock
exchanges, the broker should register his name as a broker with the SEBI. A stock broker
should possess the following qualifications to register as a broker.
i. He should be an Indian Citizen within 21 years of age

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 ii. He should not be bankrupt or compounded with creditors
iii. He should not have been convicted for any offence, fraud etc.
iv. He should not have engaged in any other business other than that of a broker
in security.
v. He should not be defaulter of any stock exchange.
vi. He should have completed 12th Standard examination.
Duties/Code of Conduct for Stock Brokers
• A stock broker should be honest and promptly execute all orders regarding upon buying and
selling of securities.
• He should make prompt payment to his clients in the case of sales and prompt delivery in
the case of purchases.
• He should not difference between small investors and big investors.
• He should issue a contract note for all transactions as specified by the stock exchange without
any delay.
• He should maintain complete secrecy of his client’s personal investment and other
information of a confidential nature.
• He should not influence purchases or sales just for the sake of his brokerage or commission.
• He should not give any false and misleading information to his clients particularly as relating
to sales and purchases of securities.
• He should not entertain those clients who have failed to carry out their commitments in
respect of securities with other stock brokers.
• He should act as duly informed to his client.
• He should have adequate infrastructure facilities and maintain proper staff to render prompt,
efficient and fair service to his clients
• He should not advertise his business publicly except when it is permitted by the stock
exchange.
• He should not adopt unfair practices with a view to attracting clients from other brokers.
• He should not fail to submit the necessary returns to the SEBI

Registration of Sub- Brokers

A sub-broker is not a member of a stock exchange. Therefore, he is a person who acts as an agent
of a stock broker. He undertakes the securities trading business on behalf of his clients by/ through
stock brokers. Sub-brokers should also get a certificate of registration from SEBI. Just like as
brokers, they have to satisfy the eligibility criteria, pay registration fees and follow the code of
conduct and the various rules and regulations framed by the regulating authorities from time to
time. In this case excepting the registration fees, other aspects are more or less similar to brokers.
Types/Kinds of Brokers
Brokers may be classified as below:
• Jobbers
• Commission Broker
• Tarawaniwalas
• Sub-brokers/Remisiers
• Floor Broker
• Odd Lot Dealer
• Budliwala

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 • Arbitrageur
• Dealers in Non-cleared Securities
• Security Dealer
• Authorized clerk
Jobbers
A Jobber is a professional and independent broker who deals in securities on his behalf. It
means, he purchases and sells securities in his own name. His main job objective is to earn a margin
of profit due to price variations of securities. Jobbers are a professional broker who carefully judges
the value of the securities and makes a good forecast of their future price movements. He buys
securities as an owner, keeps them for a very short period and sells them for profit known as the
Jobber’s turn. A Jobber will always quote a two-way price called double-barreled price. The
lower price indicates that the jobber is ready to purchase and higher price indicate that the jobber
is ready to sell the securities.
Commission Brokers
A commission broker is nothing but a broker. He buys and sells securities for earning a
commission on behalf of the clients. He is permitted to deal with non-members directly. His
main function is to buy and sell securities on behalf of his client and earning commission. He does
not purchase or sell in his name.
Tarawaniwalas
A Tarawaniwala is an active member in the stock exchange. He is similar to as Jobber.
Tarawaniwalas act as a broker and as well as a jobber. He is not prohibited from acting as a
broker. This system has a demerit that a tarawaniwala can act against the interest of investors
by purchasing securities from them in his own name at lower prices and selling the same
securities to them at higher prices.
Sub-broker
A sub-broker is an agent of a stock broker. He helps the clients to buy and sell securities only
through the stock broker.
Floor Broker
Floor brokers are not found on Indian Stock Exchanges. The floor broker buys and sells
shares for other brokers on the floor of exchange. The floor brokers are not officially attached
to other members. The floor broker executes orders for any members and receives as his
compensation a share of brokerage charged by the commission.
Odd Lot Dealer
The odd lot dealer specializes in buying and selling in amount less than the prescribed trading
units or lots. He buys odd lots and makes them up to marketing trading units or lots. He engaged
in round lot transactions (A round lot is a standard number of securities to be traded on an
exchange. In stocks, a round lot is considered 100 shares or a larger number that can be evenly
divided by 100.). The price of the odd lot is determined by the round lot transactions. He earns
high profit on the difference between the price at which he buys and sells the securities. He does
not rely on commission.
Buddiwala/Budliwalla
Buddiwala is a financier in the stock exchange. He is also known as Budliwalla. He is giving
credit facilities to the market. And he charges a fee which is called as ‘Contango’ or
‘Backwardation’ charge. He gives a secured loan that for a short period of two to three weeks.
The return is governed by technical position of the market and ruling the rate of interest.

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Arbitrageur
Arbitrageur is a specialist in buying and selling in securities in different markets at the same
time and profits by the difference in the price between the two stock exchanges.
Dealers in Non-cleared Securities
He is a specialist in buying and selling on his own account the shares which are not in the active
list.
Security Dealer
He is a specialist in buying and selling the Government or Gilt-Edge securities (Gilt-edged
securities are high-grade investment bonds offered by governments and large corporations as a
method of borrowing funds.).
Authorized Clerks
An authorised clerk is one who is appointed by a stock broker to assist him in the business of
securities trading. As per the rules of the stock exchange, each broker can employ a specified
number of authorized clerks to transact the securities trading business.

FUNCTIONS OF SECONDARY MARKET

1. Liquidity of securities as securities can be converted into cash readily
2. Marketability of securities as it facilitates buying and selling of securities.
3. Safety of funds belonging to investors
4. Availability of long-term funds
5. Flow of funds to profitable projects.
6. Motivation for improved performance by companies to get competitive edge.
7. Promotion of investment opportunities.
8. Availability of business information.
9. Reflection of business cycle.
10. Promotes marketing of new issues by companies.

Kind/Types of Transaction in a Stock Exchange

The Stock Exchanges are permitted to the members on behalf of his client to enter into transactions
in securities as outlined:
Spot Delivery: Means for delivery and payment on the same day.
Hand Delivery: Means for delivery and payment with the time, which shall not more than 14
days.
Special Delivery: For delivery and payment within any time exceeding 14 days following the
date of contract as may be stipulated when entering into the bargain and permitted by the
governing board.
Badla Transaction: Badla transaction/carry over refers to the postponement of the settlement
of transaction till the next settlement period. It is a facility to carry forward the transaction
from one settlement period to another. If the buyers/sellers wish to carry forward their transactions
from settlement period to the next settlement period, they draw up a fresh set of contract notes
to give effect to the carry forward of the purchase/sale at rates which reflect the badla charges.
Badla Charges: Badla charges or interest charges are fixed on the basis of demand and
supply conditions in the market and they are fixed on a fortnightly basis. Therefore, the Badla
charges could vary in different settlement periods. The carry forward charges or interest is to be
paid by the buyer or seller in each scrip sold (Scrip is a type of alternative or substitute currency

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that can only be redeemed at a certain company. Rewards points, gift cards, and coupons are all
familiar examples of scrip that can be used in place of legal tender). Badla charges or the amount
of interest charges is also known as Vyaj Badla.
Factors Influencing Badla Rates:
The Badla charges or the amount of interest charges which are contracted to be paid as a result of
carry forward the transaction from one settlement period to another are based on several factors as
outlines below:
• The total amount of badla finance available in the market
• The speculative business position in the market
• Availability of badla finance for a particular scrip (scrip means speculative transaction)
• The present interest rates in the money market
• The psychological state of the market.

Speculation on the Stock Exchange

Speculation transactions are made with the intention of making profits by disposing of securities
at favourable prices. Speculative transactions does not involve full payment for and taking delivery
of the securities which the speculators have contracted to transfer. Speculators do nottake/give
delivery of shares. They deal in differences in the purchase and sale prices. Their main intention
is to carry forward the transactions and get short term gains due to price differences.
Kinds/Types of Speculators
Speculators of the stock exchanges may be classified into the three.:
1. Bull: A Bull is also known as Tejiwalla, Bulls are very optimistic of the rise in prices of
securities. He is a speculator who buys shares in the expectation of selling it at a higher
price latter. Thus, in a bull market there will be excess of purchases over sales.
2. Bear: A bear is also known as Mandiwalla. Bears are very pessimistic and always they
expect a fall in the prices of securities in future. Hence, bear goes on selling securities.
Therefore, a bearish market refers to a falling market and there will be excess sales over
purchases.
3. Stag: A stag neither buys nor sells but applies for subscription to the new issues
expecting that he can sell them at a premium. Generally, Stag buys new issues and sell it
on allotments or even before allotment for a profit.
4. Lame Duck: A lame-duck investor and speculator finds themselves in an unforeseen
circumstance. These traders experience unexpected losses due to failure to develop a
successful trading strategy. The phrase can also refer to bulls, although it’s typically used
to signify a bear that can’t keep up his half of the bargain.

SPECULATIVE TRANSACTIONS
Option Dealing:
Option is the right to buy or sell a certain quantity of security at a certain price within a
certain time. The option to buy is known as call option or Teji Sauda and the option to sell is
known as Put Option/Mandi Sauda. The Put and Call is double option (known as Teji Mandi)
giving right either to purchase or to sell securities. In option dealing, a speculator is given the right
or option to buy or sell, or both buy and sell as the case may be on the settlement day or else he
will forfeit/lose the option money.
Wash Sales:

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 It is technique through which a speculator is able to earn huge profits by creating a
misleading picture in the market. It is of fictitious transaction in which a speculator sells and buys
security at a higher price through another broker. However, it creates a false or misleading opinion
in the market about the price of the security in question. As a result of misleading, the price records
a further rise and the speculator is able to get high profits by selling the securities to the public. It
is purely in the interest of speculators.

Arbitrage
Arbitrage is a highly skilled speculative activity. Arbitrage is a device to make profit out
of the differences in prices of a security in two different markets. Arbitrages refers to carry of a
security from one market to another, it is also described as traffic in securities. Such a traffic may
be carried on between two markets within the country is known as domestic arbitrage. A traffic
may be carried on between two markets with one country to another country is known as Foreign
Arbitrage.
Cornering
Cornering the market is obtaining and holding/owning enough stocks, assets, or
commodities to effectively control the market price of said items. It involves acquiring the biggest
market share without becoming a monopoly.
There are a number of ways to attempt market cornering. The most straightforward
approach is to buy and hoard a massive percentage of a certain commodity. Specifically, in the
area of futures trading, cornering is more easily accomplished than in any other market. A cornerer
may purchase a huge amount of futures contracts for a particular commodity, inflating the price
and ultimately looking to sell and bring in a huge profit.
Cornering refers to the process of holding the entire supply securities by an individual or a
group of individuals in terms of the short sellers (short position or Bears) and earning more profits.
In this case, the short sellers (i.e., bears) who have contracted to sell the security without actually
possessing it would be unable to deliver it to the buyers, who have cornered the market. It is also
a prohibited activity.
Rigging the Market
Rigging is the process to create an artificial condition in the market. This impact is the
price fluctuation of the securities in the market. Speculators main intention is earning of huge profit
from the speculation
Blank Transfers
Blank transfer helps to speculative activities by through carry-over/ badla transactions. The
transferor (seller) signs the transfer form without specifying the name of the transferee (buyer) as
known as blank transfer. Badla/carryover transactions are involves temporary purchases and sales
of securities.
Blank transfer is an undesirable activity due to the following reasons:
• In the case of partly paid-up capital, the seller’s liability is continuing even after he actually
sold it. It is not justifiable.
• Blank transferee escapees from the payment of stamp duty and transfer fees etc. which is
the loss of revenue to the government.
• In the case of blank transfer, the transferee’s name is not disclosed. Therefore, he can evade
income tax.
• Blank transferees to gain control of the management of companies without disclosing their
names.

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 • The blank transferee’s name will not be recorded in the register of companies. Therefore,
the registers are incomplete and misleading information to perspective investors.
• Registered shares are made freely negotiable through blank transfers. However, it
encourages unhealthy speculation.

Margin Trading
Margin Trading is a popular method of Speculative Trading. In this method, the client
opens an account with his broker. Client makes deposit of cash or securities in his account. Client
has agreed to maintain a minimum margin of amount deposit always in his account. When, broker
purchases securities on behalf of his client his account will be debited and vice versa

TRADING AND SETTLEMENT SYSTEM OF STOCK EXCHANGE

TRANSACCTIONS

Trading Procedure in A Stock Exchange:

The stock exchange operations at floor level are highly technical in nature. Non-members are not
permitted to enter into the stock market. Hence, various stages have to be completed in executing
a transaction at a stock exchange. The steps involved in the method of trading are as follows:
1. Selection of a broker:
The buying and selling of securities can only be done through SEBI registered brokers who are
members of the Stock Exchange. The broker can be an individual, partnership firms or corporate
bodies. So the first step is to select a broker who will buy/sell securities on behalf of the investor
or speculator.
2. Opening Demat Account with Depository:
Demat (Dematerialized) account refer to an account which an Indian citizen must open with the
depository participant (banks or stock brokers) to trade in listed securities in electronic form.
Second step in trading procedure is to open a Demat account.
The securities are held in the electronic form by a depository. Depository is an institution or an
organization which holds securities (e.g. Shares, Debentures, Bonds, Mutual (Funds, etc.) At
present in India there are two depositories: NSDL (National Securities Depository Ltd.) and CDSL
(Central Depository Services Ltd.) There is no direct contact between depository and investor.
Depository interacts with investors through depository participants only.
Depository participant will maintain securities account balances of investor and intimate investor
about the status of their holdings from time to time.
3. Placing the Order:
After opening the Demat Account, the investor can place the order. The order can be placed to the
broker either (DP) personally or through phone, email, etc.
Investor must place the order very clearly specifying the range of price at which securities can be
bought or sold. e.g. “Buy 100 equity shares of Reliance for not more than Rs 500 per share.”
The orders may take any one of the following forms:
a) At best order: It is an order which does not specify any specific price. It must be executed
immediately at the best possible price. The client may also fix a time-frame within which the order
has to be executed.

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Ex: ‘Buy 100 Essar Oil shares at Best’
b) Limit order: It is an order for the purchase or sale of securities at a fixed price specified by the
client.
Ex: ‘Sell 100 DCM at Rs.76’
c) Immediate or cancel order: It is an order for the purchase or sale of securities immediately at
the quoted prices. If the order could not be executed at the quoted prices immediately, it should be
treated as cancelled.
Ex: ‘Buy 100 shares of Infosys at Rs. 700 immediate’
d) Discretionary order: It is an order to buy or sell shares at whatever price the broker thinks
reasonable. This is possible only when the client has complete faith on the broker.
e) Limited Discretionary order: It is an order to buy or sell securities within a specified price
range and/or within the given time period as per the best judgement of the broker.
f) Open order: It is an order to buy or sell without fixing any time limit or price limit on the
execution of the order. It is similar to discretionary order.
g) Stop loss order: It is an order to sell as soon as the price falls up to a particular level or to buy
when the price rises up to a specified level. This is mainly to protect the clients against a heavy
fall or rise in prices so that they may not suffer more than the pre-specified amount.
4. Execution of orders
As per the Instructions of the investor, the broker executes the order i.e. he buys or sells the
securities. Broker prepares a contract note for the order executed. The contract note contains the
name and the price of securities, name of parties and brokerage (commission) charged by him.
Contract note is signed by the broker.
5. Settlement of Transactions
The settlement is made by means of delivering the share certificates along with the transfer deed.
The transfer deed is duly signed by the transferor, i.e., the seller. It bears the stamp of the selling
broker. The buyer then fills up the particulars in the transfer deed. At present, the settlement can
be made by nay one of the following methods:
a) On the spot settlement:
It means settlement is done immediately and on spot settlement follows T + 2 rolling settlement.
This means any trade taking place on Monday gets settled by Wednesday.
b) Forward settlement:
It means settlement will take place on some future date. It can be T + 5 or T + 7, etc. All trading
in stock exchanges takes place between 9.55 am and 3.30 pm from Monday to Friday.
At present India follows the T+2 or rolling settlement system. Rolling settlement is a system to
settle share transactions in predefined number or days. It is a mechanism of settling trades done on
a stock exchange on the Day of Trade (T) plus "X" trading days. "X" trading days could be any
number of days like 1,2,3,4 or 5 days. So, if we say the rolling settlement for a transaction is T+3
then it means that the transaction will be settled in TODAY + Next 3 Days. In other words, in T+3
environments, a trade done on T day is settled on the 3rd working day excluding the T day.
At NSE and BSE, trades in rolling settlement are settled on a T+2 basis i.e. on the 2nd working
day. Saturdays and Sundays are excluded because the stock exchanges remain closed on weekends.

PLAYERS IN THE STOCK MARKET

The key players in the stock market are:
1. Stock exchanges – they act as a facilitator for trading
2. SEBI – acts as a regulator in the market

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3. Depositories - Depository is an institution which maintains an account for investors’ securities
(share, debentures, mutual fund etc) in a dematerialized or an electronic form and the exchanges
of securities takes place.
4. Dealers - An individual or entity, such as a securities firm, who it acts as a principal and stands
ready to buy and sell for its own account. More generally, an individual or entity which buys and
sells products and holds an inventory
5. Broker - An individual or firm who acts as an intermediary between a buyer and seller, and
usually charges a commission for securities and most other products. Broker requires a license to
function.
6. Retail investor - An individual who purchases small amounts of securities for him/herself, as
opposed to an institutional investor. They are also called individual investors or small investors.
7. Domestic institutional investors: This includes mutual funds, insurance companies, pension
funds, banks, financial institutions etc
8. Foreign Institutional Investors (FIIs) - A hedge fund, pension fund manager, mutual fund,
bank, insurance company, large corporate buyer, or a representative agent for any of these parties
that is registered to do business in a country other than where the investment instrument is being
purchased. The investor takes positions in foreign financial markets on behalf of the institution in
the home country.
9. Speculators - A person who makes risky investments, anticipating a major change in the future
price of the asset.
10. Arbitrageurs - A trader who uses arbitrage strategies to take advantage of price disparities
between the same security, currency, or commodity in two different markets.

MERITS OF STOCK MARKET

• Stock market is an Economic Barometer of the country.
• Stock Market provides continuous and ready market for securities.
• Stock Market ensures transparency in dealing through proper regulation mechanism.
• Stock Market contributes to the Economic growth in the country
• It allows for spreading of Equity cult
• It provides scope for speculation
• Stock Market provides liquidity to the existing investment
• It facilitates better allocation of capital
• Promotes the habits of savings and investment
DEMERITS OF STOCK MARKET
• Companies listed in the stock market may become vulnerable to market fluctuations
beyond control – including market sentiments, economic conditions or developments in
the sector.
• Companies listed in the stock market become more responsible to shareholders which may
divert them from their own objectives
• Extreme downturn in the stock market may result in erosion of investment of small and
retail investor
• Stock market may become vulnerable to scams as happened in the past
• Excessive speculation in the stock market may be dangerous.

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Bombay Stock Exchange (BSE)
A stock exchange is a central marketplace for stocks, commodities, bonds, and derivatives.
Companies can issue shares to the general public, and investors can buy and sell them. By means
of regulations, stock exchanges ensure fair pricing, transparency, and liquidity for these securities.
The Bombay Stock Exchange (BSE) is one of India’s oldest and most prestigious stock exchanges.
It was founded in 1875 in Mumbai, Maharashtra, as the “Native Share & Stock Brokers’
Association.” BSE Limited is now its official name. However, it is popularly called BSE. BSE
stands for Bombay Stock Exchange. The BSE is vital for the Indian financial market since it
provides a trading platform for buying and selling a variety of financial products, notably stocks
and equities, but also commodities, derivatives, and mutual funds. It is a significant contributor to
the country’s economic growth and acts as a measure of the performance of the Indian economy.
BSE is famous for its major stock market index, the Sensex (short for Sensitive Index),
which tracks the performance of the exchange’s 30 largest and most actively traded companies.
The BSE has played an important part in shaping the growth of India’s capital markets and the
country’s economy as a whole. It operates under the regulatory framework established by the
Securities and Exchange Board of India (SEBI), the Indian securities markets’ regulatory
authority.

History of Bombay Stock Exchange (BSE)

The Bombay Stock Exchange (BSE) has an extensive history dating back to the late 1800s. Here’s
a brief summary of the BSE’s main historical turning points and developments:
Landmark Year Significance
Foundation 1875 The BSE began as the “Native Share & Stock Brokers’ Association”
in Mumbai (then Bombay) in 1875. It began as an informal meeting
of stockbrokers in front of the Town Hall under a banyan tree.
Recognition 1957 The BSE was granted legal stock exchange status by the Indian
government in 1957 under the Securities Contracts (Regulation) Act.
Shifting base 1980 The BSE moved its trading floor from the banyan tree to Dalal Street
to Dalal Street in Mumbai in 1980, which became its iconic position.
Sensex Launch 1986 In 1986, the BSE introduced the Sensex (S&P BSE Sensex). It
consists of 30 of the largest, and most actively traded equities on the
exchange and is one of the most followed stock market indices in
India.
Introduction of 1995 The BSE replaced open outcry trading with automated trading in
Computers 1995. This development significantly increased trading capacity and
efficiency.
Global 2007 The Bombay Stock Exchange (BSE) gained international
Recognition prominence with the establishment of a formal relationship with
Deutsche Börse in 2007. This arrangement facilitated cross-market
access for investors from both exchanges, therefore enhancing the
global awareness of the BSE.
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The Bombay Stock Exchange (BSE) has emerged as a significant organization within India’s
financial domain, serving as a significant contributor to the country’s economic growth and
development.

Features of Bombay Stock Exchange (BSE)

The Bombay Stock Exchange (BSE) provides a variety of features and services to investors,
traders, and listed firms in the Indian market. The following are a few prominent characteristics of
the Bombay Stock Exchange (BSE):
1. Stock Trading: The Bombay Stock Exchange (BSE) serves as a key marketplace for the
exchange of equities, namely stocks and shares, belonging to publicly listed corporations inside
India. Investors have the ability to engage in the purchase and sale of these securities within the
specified trading hours.
2. Listing Services: Through initial public offerings (IPOs) and follow-on public offerings
(FPOs), the BSE helps companies get listed in the stock market. Companies can get money by
selling shares to the public and getting listed on an exchange.
3. Commodities Trading: BSE also has a place where buyers can buy and sell derivatives of
commodities like gold, silver, and agricultural goods.
4. Regulatory Compliance: The BSE makes sure that listed companies follow the rules set by the
Securities and Exchange Board of India (SEBI) and other important bodies about disclosure and
other rules.
5. Corporate Governance: The exchange encourages good corporate governance and openness
among businesses that are listed, which is important for maintaining investor trust.

Functions of Bombay Stock Exchange (BSE)

The key functions of the Bombay Stock Exchange are as follows:
1. Price Determination: On the secondary market, the prices of securities are determined by
demand and supply. Therefore, the BSE assists in this process by continuously evaluating all listed
securities. Moreover, investors can readily monitor the prices of these securities using the
SENSEX index.
2. Contributes to the Economy: BSE provides a trading platform for various companies’
securities. Continuous reinvestment and disinvestment are integral to the trading procedure. This
presents an opportunity for capital formation, funds flow, and economic growth.

3. Facilitates Liquidity: The most essential function of the BSE is to facilitate the sale and
purchase of securities. This enables investors to convert existing securities into cash at any time.
Therefore, investors can purchase and sell at any time, providing them with high liquidity.
4. Transactional Safety: After verifying the company’s position, BSE ensures that the securities
are listed. In addition, all listed companies are required to abide by the Securities and Exchange
Board of India (SEBI) rules and regulations.

Importance of Bombay Stock Exchange (BSE)

The Bombay Stock Exchange (BSE) is similar to a large marketplace where people purchase and
sell “stocks” or “shares” of businesses. It is essential because it allows businesses to develop by
raising funds from the public. It also enables ordinary people to invest in these enterprises and
potentially profit from ownership. The success of the nation’s enterprises is a positive indicator
for everyone. In addition, it serves as a large scoreboard for the economy, indicating how things

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are moving forward. Therefore, it is not just a platform to trade stocks; it is an integral element of
the financial system of the country.
1. Liquidity and Investment Opportunities: The BSE facilitates the purchase and sale of equities
and other financial instruments, providing a liquid market for investors to exchange their
investments. This liquidity facilitates the purchase and sale of assets by investors.
2. Economic Indicator: The performance of the BSE is frequently viewed as a barometer of the
Indian economy as a whole. When the stock market performs well, it may indicate economic
growth and stability.
3. Financial Inclusion: The BSE has introduced a number of initiatives aimed at encouraging
financial inclusion, making it possible for a broader segment of the population to invest in the
stock market and thus participate in wealth creation and economic development.
4. Market Benchmark: BSE’s primary index, the S&P BSE Sensex, is widely regarded as an
indicator of the Indian stock market’s performance. Investors, analysts, and fund managers use it
to evaluate market trends and performance.
5. Corporate Governance and Transparency: Listed companies on the BSE are subject to
stringent regulatory and reporting requirements that encourage transparency and corporate
governance. This is essential for establishing investor confidence.

National Stock Exchange (NSE)

The National Stock Exchange of India (NSEI) was established in 1994to encourage stock
exchange reform through system modernization and competition. It is an electronic screen-based
system where members have equal access and equal opportunity of business irrespective of their
location in different parts of the country as they are connected through a satellite network.
The National Stock Exchange is to operate in two segments as outlined below:
• Wholesale Debt Market: Wholesale Debt Market is concerned with trading instruments
such as Gilt-edge securities, commercial papers, PSU Bonds, units, and certificate of
Deposits.
• Capital Market: The Capital Market is concerned with equity and corporate debt
instruments.

OBJECTIVES OF NATIONAL STOCK EXCHANGE

The NSE objectives as outlined below:
• It establishes nationwide trading facility for equity debt and hybrid.
• It facilitates equal access to investors across the country.
• It provides fairness, efficiency and transparency to the securities trading.
• It enables shorter settlement cycles.
• It meets international securities market standard.

FEATURES OF NSE
• It set up a fully automated screen-based trading system
• It has consists of three segments: The capital market segment, wholesale debt market
segment and derivatives market
• It market is a fully automated screen based environment

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 • It owns satellite network by through market operates with all participants stationed at their
office and making use of their computer terminals, to receive market information, to enter
orders and execute to trade.
• The NSE has opted for an order driven system. This system provides enormous flexibility
to trading members. A trading member can place various conditions on the order in terms
of price, time or size when an order is placed by a trading member; an order confirmation
slip is generated. All orders received are staked in price and time priority. The computer
system automatically reaches for a match and no sooner to the same is found the deal is
struck.
• When a trade takes place, a trade confirmation slip is printed at the trading member’s work
station.
• It pending orders is delayed, the identity of the trading is not revealed to others
• On the eighth day of trading, each member get a statement showing his net position as the
clearing house of the securities.
• Members are required to deliver securities and cash by the thirteenth and fourteenth day
respectively, the fifteenth day is the payout day.
• It automated trade matching system secures the best prices available in the market to the
investor

OVER THE COUNTER OF EXCHANGE OF INDIA (OTCEI)

Meaning
Over the counter market is a market where buyers seek out sellers’ and vice versa and then
attempt to arrange terms and conditions for purchase/sale acceptable to both parties. In OTC refers
trading take place by putting buy and sell orders by telephone, telex, letter, oral message, etc. There
is no particular market place in the geographical area.
OTCEI- ORIGIN
The OTCEI was incorporated in 1990 as a company under the Companies Act 1956. It became
fully operational on September 1992, with opening of a counter in Bombay. The OTCEI is
recognised by the Government of India as a recognized Stock Exchange under Section 4of the
Securities Control Regulation Act, 1956
BASIC OBJECTIVES OF OTCEI
• Quicker liquidity
• Fixed and Fair Price
• Liquidity for a less trade security or it suited to small company
• Simplified process of buying and selling
• Creation of public interest in risky, although viable ventures•
• Easy of making public sale of new issues.

Promoters:
The OTCEI has been promoted by all financial institutions in India such as UTI, ICICI,
IDBI, IFCI, LIC, GIC, SBI Capital Markets, etc.
BENEFITS TO THE INVESTORS
The OTC Exchange offers a number of benefits to the investors. They are as mentioned below:
• Quick payment of money to the sellers and quick delivery of shares to buyers

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 • Price transparency means buyer and seller know the actual price at which the scrips are
bought or sold for him in other stock exchanges
• The OTCEI saves the investors from other unscrupulous behavior of the brokers
• Liquidity even for scrips of small and new companies
• Fair prices
• Simple procedure of buying and selling
• Facility to sell even odd lots.

BENEFITS TO THE COMPANIES

The OTC exchange offers certain benefits to the companies. The benefits are outlined below:
• It enables even smaller and less liquid companies to get listed
• Facilitate new issues at lower cost
• Market raising capital through issues easy for small, new and closely held companies
• Helps create market for scrips of small and new companies.

PROBLEMS/LIMITATIONS/DEFECTS OF INDIAN STOCK MARKET

The Indian Stock Market has suffered from many limitations. Important limitations are outlined
below: These are the major factors for impact of certain economic indicators on stock exchange.
1. Absence of Genuine Investors
Speculative activities are created absence of genuine investors. Therefore, speculators always earn
more profit from buying and selling of securities in the securities market. Most of the transactions
are carry forward transactions with a speculative motive of deriving benefit from short term
fluctuations.
2. Lack of Transparency
SEBI regulates stock exchanges in India but is unable to regulate the stock market operations of
brokers and speculators. Many brokers and speculators are violating rules and regulations with a
view to cheating to the customers in the market.
3. High Volatility of Stock Market
Research survey has indicated that the high price fluctuations in the capital market. The high price
volatility is not good for smooth functioning of the stock market
4. Problem of Odd Lots
Odd lots means tradable securities are not listed in the market. This is the major problem to the
security holders. It discourage to the trading activities to the investor.
5. Dominance of Financial Institutions

Financial institutions like LIC, UTI, GIC are dominated in the stock market. In addition, they
majorly influence and control in the securities market in stock exchange.
6. Lack of Professionalism
Professionals are efficiently managed and Administration of the security operations. The lack of
the professionalism has been creating several problems to investors, brokers and speculators.
Professionals are aware of the financial institution role in the operation market. If lack, a problem
for brokers and their clients.
7. Presence of Price Rigging
There is a strong bull moment in a market has created artificially demand for the products and push
up the prices before the issues of securities. This process has generally done by a few group
involved in buying and selling of the securities.

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8. Prevalence of Insider Trading
Insider Trading has been a practice which is accepted in India although, SEBI has introduced many
regulations to control the insider trading. Insider means insider are those who have access to
unpublished price-sensitive information by virtue of their good positioning the company and who
ready to use such information in their best merits.
9. Lack of Liquidity
Around 8000 companies are listed in Stock Exchanges in India. The shares of only a few
companies are actively traded in the market and become they are liquid. Remaining shares of the
listed companies are not actively traded in the market and become they are lack of liquidity.
10. Scarcity of Floating Securities
In the stock market, there is a scarcity of floating securities. The security market is highly volatile
and easy price manipulations. In additionally, there is inadequate supply of good scrips and
imbalance of demand and supply of securities in the market

Securities and Exchange Board of India (SEBI)

SEBI stands for Securities and Exchange Board of India. It is a statutory regulatory body that was
established by the Government of India in 1992 for protecting the interests of investors investing
in securities along with regulating the securities market. SEBI also regulates how the stock market
and mutual funds function.

Objectives of SEBI
Following are some of the objectives of the SEBI:
1. Investor Protection: This is one of the most important objectives of setting up SEBI. It involves
protecting the interests of investors by providing guidance and ensuring that the investment done
is safe.
2. Preventing the fraudulent practices and malpractices which are related to trading and
regulation of the activities of the stock exchange
3. To develop a code of conduct for the financial intermediaries such as underwriters, brokers,
etc.
4. To maintain a balance between statutory regulations and self-regulation.

Purpose of SEBI
The purpose for which SEBI was setup was to provide an environment that paves the way for
mobilisation and allocation of resources.It provides practices, framework and infrastructure to
meet the growing demand.
It meets the needs of the following groups:
1. Issuer: For issuers, SEBI provides a marketplace that can utilised for raising funds.
2. Investors: It provides protection and supply of accurate information that is maintained on a
regular basis.
3. Intermediaries: It provides a competitive market for the intermediaries by arranging for proper
infrastructure.

Structure of SEBI
SEBI board comprises nine members. The Board consists of the following members.
One Chairman of the board who is appointed by the Central Government of India

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One Board member who is appointed by the Central Bank, that is, the RBI
Two Board members who are hailing from the Union Ministry of Finance
Five Board members who are elected by the Central Government of India
Functions and Powers of SEBI
Functions:
SEBI has the following functions
1. Protective Function
2. Regulatory Function
3. Development Function
The following functions will be discussed in detail
1. Protective Function: The protective function implies the role that SEBI plays in protecting the
investor interest and also that of other financial participants. The protective function includes the
following activities.
a. Prohibits insider trading: Insider trading is the act of buying or selling of the securities by the
insiders of a company, which includes the directors, employees and promoters. To prevent such
trading SEBI has barred the companies to purchase their own shares from the secondary market.
b. Check price rigging: Price rigging is the act of causing unnatural fluctuations in the price of
securities by either increasing or decreasing the market price of the stocks that leads to unexpected
losses for the investors. SEBI maintains strict watch in order to prevent such malpractices.
c. Promoting fair practices: SEBI promotes fair trade practice and works towards prohibiting
fraudulent activities related to trading of securities.
d. Financial education provider: SEBI educates the investors by conducting online and offline
sessions that provide information related to market insights and also on money management.
2. Regulatory Function: Regulatory functions involve establishment of rules and regulations for
the financial intermediaries along with corporates that helps in efficient management of the market.
The following are some of the regulatory functions.
a. SEBI has defined the rules and regulations and formed guidelines and code of conduct that
should be followed by the corporates as well as the financial intermediaries.
b. Regulating the process of taking over of a company.
c. Conducting inquiries and audit of stock exchanges.
d. Regulates the working of stock brokers, merchant brokers.
3. Developmental Function: Developmental function refers to the steps taken by SEBI in order
to provide the investors with a knowledge of the trading and market function. The following
activities are included as part of developmental function.
i. Training of intermediaries who are a part of the security market.
ii. Introduction of trading through electronic means or through the internet by the help of registered
stock brokers.
iii. By making the underwriting an optional system in order to reduce cost of issue.

Powers of SEBI:
SEBI wields a spectrum of powers that allow it to function effectively as a regulatory authority.
These powers can be categorised into three broad classifications: quasi-judicial. quasi-executive,
and quasi-legislative.
1. Quasi-judicial powers
Adjudication authority:

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 • SEBI possesses quasi-judicial powers, allowing it to adjudicate on matters related to
securities law violations.
• It has the authority to conduct hearings, examine evidence, and pass orders, ensuring a fair
and impartial resolution of disputes within the securities market.
Settlement proceedings:
• SEBI has the power to facilitate settlement proceedings between parties involved in
disputes.
• Through consent orders. SEBI can bring about resolution and enforce compliance without
resorting to prolonged legal processes.
2. Quasi-executive powers
Enforcement and implementation:
• SEBI is vested with quasi-executive powers, enabling it to enforce compliance with
securities laws and regulations.
• The regulatory body can take actions such as imposing fines, penalties. and other measures
to ensure market participants adhere to prescribed standards.
Conducting investigations:
• SEBI has the authority to conduct investigations into potential violations of securities laws.
• This quasi-executive power allows SEBI to gather information, inspect records, and take
corrective measures to maintain market integrity.
3. Quasi-legislative powers
Rule-making authority:
• SEBI possesses quasi-legislative powers. allowing it to formulate and promulgate rules and
regulations for the securities market.
• This authority enables SEBI to adapt to changing market dynamics and enact measures that
foster fair. transparent. and efficient market practices.
Policy formulation:
• SEBI has the power to formulate policies that guide the development and regulation of the
securities market.
• This quasi-legislative role positions SEBI as a dynamic institution capable of responding
to emerging challenges and opportunities in the financial landscape.
Important SEBI rules and guidelines
SEBI has several rules and guidelines that it has established to regulate the securities market in
India. Some of the important ones are:
1. SEBI (prohibition of insider trading) regulations, 2015: This regulation prohibits insider
trading in securities and provides a framework for detecting and preventing insider trading.
2. SEBI (listing obligations and disclosure requirements) regulations, 2015: This regulation
lays down the listing obligations of companies that have listed their securities on stock exchanges
in India. It also provides for the disclosure requirements that these companies must comply with.
3. SEBI (substantial acquisition of shares and takeovers) regulations, 2011: This regulation
provides for the acquisition of shares and takeovers of companies listed on stock exchanges in
India. It lays down the procedures and disclosures that must be followed by acquirers and target
companies.
4. SEBI (issue of capital and disclosure requirements) regulations, 2018: This regulation lays
down the disclosure requirements for companies that issue capital and provides a framework for
the issuance of securities by these companies.

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5. SEBI (prohibition of fraudulent and unfair trade practices) regulations: This regulation
prohibits fraudulent and unfair trade practices in securities and provides a framework for detecting
and preventing such practices.
6. SEBI (mutual fund) regulations, 1996: This regulation lays down the guidelines for the
functioning of mutual funds in India. It provides for the registration and regulation of mutual funds,
as well as the obligations of mutual funds and their Asset Management Companies.
7. SEBI (issue of capital and disclosure requirements) regulations, 2018: This regulation lays
down the disclosure requirements for companies that issue capital and provides a framework for
the issuance of securities by these companies.
8. SEBI (buyback of securities) regulations, 2018: This regulation provides for the buyback of
securities by companies listed on stock exchanges in India. It lays down the procedures and
disclosures that must be followed by companies that wish to buy back their securities.
9. SEBI (credit rating agencies) regulations, 1999: This regulation provides for the registration
and regulation of credit rating agencies in India. It lays down the eligibility criteria for credit rating
agencies, the obligations of credit rating agencies, and the procedures for rating securities.

REFORMS IN SECONDARY/STOCK MARKET IN INDIA

1. Establishment of the NSE or, the National Stock Exchange - NSE was set up in November
1992 and began its tasks in 1994; which has now formed into a modern, electronic Market, which
positioned fourth on the planet by Value Exchanging volume.
2. OTCEI or, the Over-the-Counter Exchange of India - was established in 1992. It was
promoted by a group of prominent Indian financial institutions, such as UTI, ICICI, IDBI, IFCI,
and LIC, among others. It is an electronic public Stock trade posting a totally new arrangement of
organizations which won't be recorded on other Stock trades.
3. DIP or, the Disclosures and Investors Protection Rules for New Issues - NSE was set up in
November 1992 and began its tasks in 1994; which has now formed into a modern, electronic
Market, which positioned fourth on the planet by Value Exchanging volume.
4. Depository system - Since 1996, the Indian stock market has undergone a significant
transformation thanks to the implementation of the depository system and the scrip-less trading
mechanism. The Trading system was based on the physical transfer of securities before this. An
organization known as a depository holds shareholder securities in electronic form, transfers
securities among account holders, makes ownership transfers possible without handling securities,
and makes it simple to store securities.
5. The NSCL, or National Securities Clearing Corporation Ltd - was established in 1996. Since
July 1996, it has guaranteed all NSE trades. The NSCL is answerable for post-exchange exercises
of the NSE. Getting and settlement free from exchanges and Chance administration are its focal
capabilities.
6. Trading with Central Government Securities - to energize more extensive cooperation of all
segments of investors, that include retail investors all over the nation. Trading with government
securities has been presented from January 2003. This is done through a cross country, unknown,
order driver, trading framework of the stock exchanges that is screen-based exactly as equity
trading.
7. Mutual Funds - One of the most significant developments in the Indian capital market is the
emergence of diversified mutual funds. Their main job is to get people's savings together and put
it into Stock Market Securities. Households can participate in the Securities Market in a significant
way through mutual funds.

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