Secondary market hard copy


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Secondary market hard copy

  2. 2. Class : S.Y.B.F.M. Semester : 3rd PRESENTATION ON : Secondary market Submitted to : Prof. Priya Shroff Academic year : 2011-12
  4. 4. Financial Market : Financial markets consist of two major types : 1.Money market : The money market is a component of the financial markets for assets involved in shortterm borrowing and lending with original maturities of one year or shorter time frames. Trading in the money markets involves Treasury bills, commercial paper, bankers' acceptances, certificates of deposit, federal funds, and shortlived mortgage- and asset-backed securities. It provides liquidity funding for the global financial system. The money market consists of financial institutions and dealers in money or credit who wish to either borrow or lend. Participants borrow and lend for short periods of time, typically up to thirteen months. Money market trades in shortterm financial instruments commonly called "paper." This contrasts with the capital market for longerterm funding, which is supplied by bonds and equity.
  5. 5. 2.Capital market : It is a market for securities (debt or equity), where business enterprises (companies) and governments can raise long-term funds. It is defined as a market in which money is provided for periods longer than a year,] as the raising of shortterm funds takes place on other markets (e.g., the money market). The capital market includes the stock market (equity securities) and the bond market (debt). Financial regulators, such as the UK's Financial Services Authority (FSA) or the U.S. Securities and Exchange Commission (SEC), oversee the capital markets in their designated jurisdictions to ensure that investors are protected against fraud, among other duties. Capital markets may be classified as primary markets and secondary markets. In primary markets, new stock or bond issues are sold to investors via a mechanism known as underwriting. In the secondary markets, existing securities are sold and bought among investors or traders, usually on a securities exchange, over-the-counter, or elsewhere. Capital market is of two types : A. Primary markets and B. Secondary markets
  6. 6. Introduction 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. Majority of the trading is done in the secondary market. Secondary market comprises of equity markets and the debt markets. For the general investor, the secondary market provides an efficient platform for trading of his securities. For the management of the company, Secondary equity markets serve as a monitoring and control conduit—by facilitating valueenhancing control activities, enabling implementation of incentive-based management contracts, and aggregating information (via price discovery) that guides management decisions. The secondary market plays a very vital role as one of the indicators of the industrial development of a nation. Each and every country has the secondary markets some of the well known stock exchanges are Bombay Stock Exchange (BSE) of India, New York Stock Exchange (NYSE) of America, National Stock Exchange(NSE), London Stock Exchange of The Great Britain, NASDAQ etc.
  7. 7. Difference between the Primary Market and the Secondary Market : 1. In primary markets, securities are bought by way of public issue directly from the company. In Secondary market share are traded between two investors. 2. New issue are available in primary market. Securities already outstanding and owned by investors are usually bought and sold through the secondary market. 3. The primary is a middlemen in the secondary market are broker and dealer. 4. The primary market is one in which new issue of common stock;bonds and preferred stock are sold by companies.the secondary market stock and bonds issues are sold to the public. 5. In the primary market, securities are offered to public for subscription for the purpose of raising capital or fund. Secondary market is an equity trading avenue in which already existing/preissued securities are traded amongst investors.
  8. 8. Importance of Secondary Market : Secondary Market has an important role to play behind the developments of an efficient capital market. Secondary market connects investors' favoritism for liquidity with the capital users' wish of using their capital for a longer period. Secondary market is that financial market in which investor can buy and sell shares and bonds after its issue by company. Secondary market plays a vital role for effective movement of shares and debenture from one investor to another investor. If any investor is not interested to keep any financial product as long term investment, he just come to secondary market and sell his security to other investor. Other investor either can keep or sell to another investor. Thus secondary market is more liquidating market and very useful for all investors.
  9. 9. Characteristics of Secondary market : 1.Exchange : Once a company has gone through its IPO, investors buy and sell issued shares through intermediaries in the secondary market, which includes the traditional and electronic exchange. 2.Over the counter : Where transactions occur over the phone or on a computer. Companies with shares trading in the secondary market are required to regularly release reports describing their financial status, and any other pertinent information for the benefit of potential investors 3.Capital gain :When you sell assets at a higher price than you paid for it, the different is your capital gain.for e.g if you buy 100 share of stock for rs.20 a share and a sell them for rs.30 per share you realise a capital gain of rs. 10 a share or total rs.1000.if you own the stock for more than a year before selling it, you have long term capital gain,if you hold the stock for less than year ,you have short term capital gain. 4.Liquidity : Ability to rapidly buy or sell an assets without substainability affecting the asset’s price. Liquidity also refers to the relative ease with which an assets can be converted into cash.
  10. 10. Advantages and Disadvantages of secondary market : Advantages : Secondary markets offer advantages to both sellers and buyers. Sellers gain the advantage of effectively reducing the purchase price of products and investments by recouping a portion of what they originally paid. Sellers in secondary markets for financial products or investments that appreciate in value can actually earn a profit on the sale by bringing in more money than they originally paid. Buyers in secondary markets gain the advantage of having access to products at a more attractive price point than the original purchaser in most instances. In the case of financial secondary markets where buyers pay more than the seller originally paid, buyers make purchases in the hope that the investment will continue to appreciate, making any premium paid on the purchase irrelevant. Disadvantages : If secondary markets grow too large, they can eat into original sellers' sales and profit margins. Especially in the case of long-lasting goods such as automobiles and musical instruments, secondary markets can encourage a large percentage of shoppers to purchase used items rather than purchasing new. This, in turn, can cause original manufacturers to lower their quality standards to encourage a shorter repurchase cycle on products with a large secondary market.
  11. 11. Products available in the Secondary Market : Following are the main financial products/instruments dealt in the secondary market: 1] Equity Shares :An equity share, commonly referred to as ordinary share also represents the form of fractional ownership in which a shareholder, as a fractional owner, undertakes the maximum entrepreneurial risk associated with a business venture. The holders of such shares are members of the company and have voting rights. 2] Government securities (G-Secs) : These are sovereign (credit risk-free) coupon bearing instruments which are issued by the Reserve Bank of India on behalf of Government of India, in lieu of the Central Government's market borrowing programme. These securities have a fixed coupon that is paid on specific dates on half-yearly basis. These securities are available in wide range of maturity dates, from short dated (less than one year) to long dated (up to twenty years).
  12. 12. 3] Debentures : Bonds issued by a company bearing a fixed rate of interest usually payable half yearly on specific dates and principal amount repayable on particular date on redemption of the debentures. Debentures are normally secured / charged against the asset of the company in favour of debenture holder. 4] Bond : A negotiable certificate evidencing indebtedness. It is normally unsecured. A debt security is generally issued by a company, municipality or government agency. A bond investor lends money to the issuer and in exchange, the issuer promises to repay the loan amount on a specified maturity date. 5] Commercial Paper : A short term promise to repay a fixed amount that is placed on the market either directly or through a specialized intermediary. It is usually issued by companies with a high credit standing in the form of a promissory note redeemable at par to the holder on maturity and therefore, doesn’t require any guarantee. Commercial paper is a money market instrument issued normally for tenure of 90 days.
  13. 13. Role of broker and sub-broker in the secondary market : A broker or a sub-broker registered with SEBI can be contacted for carrying out transaction pertaining to the capital market Who is broker? A broker is a member of a recognized stock exchange, who is permitted to do trades on the screen-based trading system of different stock exchanges. He is enrolled as a member with the concerned exchange and is registered with SEBI. Who is a sub broker? A sub broker is a person who is registered with SEBI as such and is affiliated to a member of a recognized stock exchange. By veryfying the registration certificate issued by SEBI one can conform registration. A broker’s registraction number begin with the letter “INB” and that of a sub broker with the letters “INS” for the brokers of derivative segment, the registraction number begins with letters “INF”. There is no sub brokers in the derivatives segment.
  14. 14. Auction : The Exchange purchases the requisite quantity in the Auction Market and gives them to the buying trading member. The shortages are met through auction process and the difference in price indicated in contract note and price received through auction is paid by member to the Exchange, which is then liable to be recovered from the client. If the shares could not be bought in the auction i.e. if shares are not offered for sale in the auction, the transactions are closed out as per SEBI guidelines. The guidelines stipulate that “the close out Price will be the highest price recorded in that scrip on the exchange in the settlement in which the concerned contract was entered into and up to the date of auction/close out OR 20% above the official closing price on the exchange on the day on which auction offers are called for (and in the event of there being no such closing price on that day, then the official closing price on the immediately preceding trading day on which there was an official closing price), whichever is higher.
  15. 15. Margin Trading Facility : Margin Trading is trading with borrowed funds/securities. It is essentially a leveraging mechanism which enables investors to take exposure in the market over and above what is possible with their own resources. SEBI has been prescribing eligibility conditions and procedural details for allowing the Margin Trading Facility from time to time. Corporate brokers with net worth of at least Rs.3 core are eligible for providing Margin trading facility to their clients subject to their entering into an agreement to that effect. Before providing margin trading facility to a client, the member and the client have been mandated to sign an agreement for this purpose in the format specified by SEBI. It has also been specified that the client shall not avail the facility from more than one broker at any time. The facility of margin trading is available for Group 1 securities and those securities which are offered in the initial public offers and meet the conditions for inclusion in the derivatives segment of the stock exchanges.
  16. 16. For providing the margin trading facility, a broker may use his own funds or borrow from scheduled commercial banks or NBFCs regulated by the RBI. A broker is not allowed to borrow funds from any other source. The "total exposure" of the broker towards the margin trading facility should not exceed the borrowed funds and 50 per cent of his "net worth". While providing the margin trading facility, the broker has to ensure that the exposure to a single client does not exceed 10 per cent of the "total exposure" of the broker. Initial margin has been prescribed as 50% and the maintenance margin has been prescribed as 40%. In addition, a broker has to disclose to the stock exchange details on gross exposure including name of the client, unique identification number under the SEBI (Central Database of Market Participants) Regulations, 2003, and name of the scrip.
  17. 17. If the broker has borrowed funds for the purpose of providing margin trading facility, the name of the lender and amount borrowed should be disclosed latest by the next day. The stock exchange, in turn, has to disclose the scrip-wise gross outstanding in margin accounts with all brokers to the market. Such disclosure regarding margin-trading done on any day shall be made available after the trading hours on the following day. The arbitration mechanism of the exchange would not be available for settlement of disputes, if any, between the client and broker, arising out of the margin trading facility. However, all transactions done on the exchange, whether normal or through margin trading facility, shall be covered under the arbitration mechanism of the exchange.
  18. 18. SEBI Risk Management System : The primary focus of risk management by SEBI has been to address the market risks, operational risks and systemic risks. To this effect, SEBI has been continuously reviewing its policies and drafting risk management policies to mitigate these risks, thereby enhancing the level of investor protection and catalyzing market development. The key risk management measures initiated by SEBI include:Categorization of securities into groups 1, 2 and 3 for imposition of margins based on their liquidity and volatility. Vary based margining system. Specification of mark to Market margins Specification of Intra-day trading limits and Gross Exposure Limits Real time monitoring of the Intra-day trading limits and Gross Exposure Limits by the Stock Exchanges Specification of time limits of payment of margins Collection of margins on upfront basis Index based market wide circuit breakers Automatic de-activation of trading terminals in case of breach of exposure limits
  19. 19. Vary based margining system has been put in place based on the categorization of stocks based on the liquidity of stocks depending on its impact cost and volatility. It addresses 99% of the risks in the market. Additional margins have also been specified to address the balance 1% cases. Collection of margins from institutional clients on T+1 basis The liquid assets deposited by the broker with the exchange should be sufficient to cover upfront Vary margins, Extreme Loss Margin, MTM (Mark to Market Losses) and the prescribed BMC. The Mark to Market margin would be payable before the start of the next day’s trading. The Margin would be calculated based on gross open position of the member. The gross open position for this purpose would mean the gross of all net positions across all the clients of a member including his proprietary position. The exchanges would monitor the position of the brokers’ online real time basis and there would be automatic deactivation of terminal on any shortfall of margin.
  20. 20. Process of Trading : The normal course of online trading in the Indian market context is placed below: Step 1. Investor / trader decides to trade Step 2. Places order with a broker to buy / sell the required quantity of respective securities Step 3. Best priced order matches based on price-time priority Step 4. Order execution is electronically communicated to the broker’s terminal Step 5. Trade confirmation slip issued to the investor / trader by the broker Step 6. Within 24 hours of trade execution, contract note is issued to the investor / trader by the broker Step 7. Pay-in of funds and securities before T+2 day Step 8. Pay-out of funds and securities on T+2 day In case of short or bad delivery of funds / securities, the exchange orders for an auction to settle the delivery. If the shares could not be bought in the auction, the transaction is closed out as per SEBI guidelines.
  21. 21. Conclusion : Any auction you choose to take the markets is totally your own responsibility. Any one will not be liable for any, direct or indirect ,consequential or incidental damages or loss.