Equity Markets - I
Class : S.Y.B.F.M.
Semester : 3rd
PRESENTATION ON :
Submitted to : Prof. Priya Shroff
Academic year : 2011-12
Financial Market :
Financial markets consist of two major
1.Money market :
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
provides liquidity funding for the global 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.
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
Capital market is of two types :
A. Primary markets and
B. Secondary markets
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
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.
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
2. New issue are available in primary market.
Securities already outstanding and owned by
investors are usually bought and sold through the
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.
Importance of Secondary Market :
Secondary Market has an important role to play
behind the developments of an efficient capital
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
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
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
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.
Advantages and Disadvantages of
secondary market :
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.
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.
Products available in the
Secondary Market :
Following are the main financial
products/instruments dealt in the secondary
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
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.
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
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.
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
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.
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.
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
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
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
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.
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
Collection of margins on upfront basis
Index based market wide circuit breakers
Automatic de-activation of trading
terminals in case of breach of exposure
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
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
Step 3. Best priced order matches based on
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
Step 8. Pay-out of funds and securities on T+2
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.
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.