Transactions in the secondary market are not new issues and do not affect the capital of the company. It facilitates trading of securities that were introduced in the primary market. Equity shares are not redeemed by company but secondary markets allows sellers to sell them to interested buyers. Secondary markets enable price discovery of traded securities.
These quotes are collectively displayed in the real time trading information provided by the stock exchange. The continuous flow of price data allows investors to identify the market price of equity shares. If a company is doing well, more investors will be willing to buy its shares, which will increase the demand for its shares further increasing the share prices more buyers than sellers for shares.
Whereas if company is making losses, there will be more sellers ready to sell shares leading to fall in share prices due to lesser demand. Market prices provide instant information about issuing companies to all investors.
Issuing companies are constantly being monitored it ensures their efforts towards increased profitability and performance of the company. Secondary market consists of large number of investors that are constantly buying selling shares leading to price movements which in turn incorporate all relevant information into the price. Secondary Market Structure and Participants.
The stock exchange provides a platform for investors to buy and sell securities from each other in an organised and regulated manner. Trading, Clearing and Settlement: Secondary market transactions have three distinct phases: To trade in shares is to buy and sell them through the stock exchanges in an electronic order-matching system that facilities efficient and speedy execution.
Clearing includes identifying what is owed to buyer and seller. Settlement includes settling what is owed of both the parties. Settlement takes two days, i. To facilitate smooth transaction, clearing corporations become the buyer to every seller and the seller to every buyer. In order to insure against any default in payment by members of stock exchange and guarantee settlement of executed trade, stock exchange has strategies such as maintenance of adequate capital assets by members and regular imposition of margin payments on trades.
This helps in minimizing risk to members. For a security to be eligible to trade in the secondary markets, it should be held in electronic or dematerialised form with depositories. Depositories is an institution that holds and maintains a record of securities on the behalf of investors. Investors need to open Demat accounts with depository participants DPs , who are banks, brokers or other institutional providers of this service to be able to trade.
Demat account is similar to bank accounts for your securities where all entries and share certificates are electronically stored.
Transfer of shares can be easily carried out by instructing the DPs, who in turn notifies the depositories of the change in ownership of the securities. Custodians are institutional intermediaries, who are authorised to hold funds and securities on behalf of large institutional investors such as banks, insurance companies, mutual funds, and foreign portfolio investors FPIs. They settle the secondary market trades for institutional investors.
Broker and stock brokers: A broker is a member of a recognised stock exchange who is registered with SEBI and permitted to trade on the screen-based trading system of stock exchanges. A sub-broker is not a member of any recognised stock exchange but is registered with SEBI through a registered stock broker and works under him by letting investors trade in securities through the main broker. Both brokers and sub-brokers can be individuals, partnership firms, private or public limited companies, including subsidiaries of banks and financial institutions.
Registered members of the stock exchange are required to display their membership details at their front offices so that investors can verify that they are dealing with a registered entity. Trading takes place through trading terminals of only registered brokers of a stock exchange, which is then accepted and executed by the system. Brokers buy and sell securities on behalf of investors, for which they receive a commission , known as brokerage.
Maximum brokerage chargeable is fixed by individual stock exchanges. The 3 in 1 account allows an investor to merge the savings bank, demat and trading account. Banks that can also act as DPs provide these services to clients. Brokers can also offer these services wherein the demat and trading is handled by the broking agency and only the bank account is held with a bank.
An investor can open all the three accounts with the same bank or broker using a single account opening form. Funds can be easily transferred from the bank account to the trading account in case of purchase of securities and back to the bank account whenever the securities are sold or redeemed. This feature allows the demat and savings account to function only for trading purposes that takes place in the linked trading account. It facilitates delivery and receipt of shares and funds to settle the trade transactions on behalf of investor.
Though PoA is not mandatory for opening a trading account with a broker, it is required when an online 3-in-1 account is opened. Brokers must provide a duplicate or a certified true copy of the PoA to the client after execution.
PoA must be executed in the name of the broker organisation and not in the name of an employee of the organisation. POA must mention details of the bank and the demat account of the client. PoAs must be limited to transferring funds to settle trading obligations with the stock exchanges and for recovering amount due to the DP or broker for their services.
Buyers and sellers can execute their trade using the electronic trading platform. Trades can be put through by brokers on behalf of their client. Stock exchanges offer two types of trading systems: Under the open outcry system traders gather physically on trading floor and shout or signal their bid and offer prices.
Online systems allow traders to trade electronically by connecting to the system without being physically located at the exchange. Buy and sell orders placed by investors are routed to the trading system to be executed through electronic matching.
The sequence of trade execution is as follows: An order is an instruction to buy or sell a specific quantity of shares in the stock market.
For example Buy shares of Reliance Industries Ltd. Sell shares of Aditya Birla Nuvo Ltd. Correctly indicate the name of the listed company, whether to buy or sell, and number of shares.
Brokers do not accept unknown investor order — one should be a registered sub-broker or a customer of the broker or sub-broker. The symbol is usually an abbreviation of the issuing company name. The ISIN is a unique digit number that identifies a security in the depository system. For example, the equity shares of Hindalco Industries Ltd.
The buyer or seller specifies the price and trade will get executed only if the specified prices becomes available in the market otherwise the order lapses by end of the day. This way the trade will only execute at a price the investor wants it to be executed. Buy order with limit price. Trading on stock exchanges is conducted from Monday to Friday, from 9.
Different timings may be adopted for non-equity segments. There are no trades on Saturdays, Sundays and public holidays. A pre-open session is held generally 15 minutes before trading starts for the day. The first 7 or 8 minutes are for order placing, modification or cancellation. The next four minutes are for order matching and trade confirmation. The last three minutes of buffer time are used to transition to the regular trading session.
This session determines the opening price and also reduces the rush otherwise present in the normal trading session. When an investor places an order to buy a share, it is called a bid. When a sell order is placed, it is known as ask. The electronic system matches bid and ask prices in such a way that a buyer gets a price equal to or less than his bid price, and a seller gets a price equal to or more than his asking price.
If such a match is not possible, the transaction does not take place. The system is order-driven and hence there are no intermediaries. Transparent system — All bid and ask prices called quotations in the market can be seen on the screen.
Anonymous trading — bids and asks are accepted without revealing the identity of the investor. All orders are arranged in order of highest to lowest prices, and orders placed at the same price are arranged by time.
For example, suppose two buyers are bidding to buy shares of company at prices of Rs. If both buyers had bid the same price of Rs. Each order placed in the system is given a unique order number, This allows the exchange to track the order and determine how the transaction was carried out which is very useful for resolving disputes. The box below is a snapshot of the market for Hindalco on April 3, extracted from www. The first column shows the quantity at which investors want to buy shares and the next column is the price quoted one share.
The highest price as you can see is at the top and will be bought first as it is most attractive. The first two columns also known as bidding schedule show the bids of quantity ranging from 4 shares at The sellers column contain the sell price and respective quantity that they are ready to sell at that price.
As you can see the ask price ranges from Hence no orders have been matched because neither the buyer nor the seller is ready to negotiate the prices. For example, if the investor is a buyer and offers , or is a seller and offers , his order is unlikely to be matched but if the buyer modifies his bid and is ready to pay the order can be executed.
Another scenario could be if the seller modifies his ask price to and is ready to sell at little lower the order can be executed because the prevailing buy price in the market is as well.
After an order is placed on the system, it searches for a matching order. If no matches are found, the order stays in the system until the end of the trading day, or until it is cancelled. When an order is executed, a trade confirmation slip is generated. This gives details of the trade number, the price and quantity at which the trade was carried out, the time of trade, and the unique order number corresponding to the trade.More...