FINANCIAL INSTITUTIONS AND MARKETS

Chapter-3
Primary market and secondary market
I Primary market
INTRODUCTION
 The primary market is a type of capital market that deals with the new issue of stocks and securities.
 The main functions of a primary market include origination, underwriting and distribution.
 Origination is to identify, assess and process new securities for the issue.
MEANING OF PRIMARY MARKET
 Primary market is the place where securities are created. Companies float (in finance lingo) new stocks and
bonds in this market for the first time.
 In the primary market, companies and government entities sell new shares, bonds, note bills in order to
finance business improvements and expansions.
 Though an investment bank may set the securities’ initial price and receive a fee for facilitating sales, most
of the proceeds go to the issuer.
Features of primary market
Here are some key features of the primary market:
1. Initial Issuance: In the primary market, companies or governments issue new securities to raise capital.
These securities are offered to the public for the first time.
2. Capital Raising: The primary market allows entities to raise funds for various purposes, such as
expanding operations, launching new projects, repaying debt, or meeting other financial needs.
3. Underwriting: Often, investment banks or financial institutions act as underwriters. They purchase the
securities from the issuer and then resell them to the public, assuming the risk of not being able to sell all
the issued securities,
4. Transparency: Issuers in the primary market are required to provide detailed information about their
financial health, operations, and future prospects to potential investors. This transparency is crucial for
investors to make informed decisions
5. Regulation: Primary market activities are subject to regulatory oversight to protect investors and maintain
market integrity. Regulations may vary by country but generally involve disclosure requirements and the
approval of prospectuses.
6. Pricing: The pricing of securities in the primary market is typically determined through various methods,
including fixed price offerings, book-building processes, or Dutch auctions. The pricing method depends
on the type of security and market conditions,

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7. Allotment: In the primary market, securities are allotted to investors based on their subscription or bids.
Depending on the demand and the specific allocation rules, not all investors may receive the full number
of securities they applied for.
8. Minimum Investment: Some primary market offerings may have minimum investment requirements,
which can limit participation to larger investors or institutions.
9. Lock-Up Period: In some cases, issuers or underwriters may impose a lock-up period on early investors,
restricting their ability to sell the securities for a specified period after the initial offering.
10. Market Impact: The primary market offering can impact the secondary market, as the introduction of
new securities may affect supply and demand dynamics, leading to price fluctuations.
11. Long-term Investments: Investors in the primary market often have a longer-term investment horizon,
as they are typically buying securities with the intention of holding them for an extended period.
12. Subscription Period: There is a specified period during which investors can subscribe to or purchase the
newly issued securities. Once this period expires, the issuer allocates the securities and trading may
commence in the secondary market.

Advantages of Primary Market

• It can raise capital at relatively low cost,
• The securities so issued in the primary market provide high liquidity as the same can be sold in the
secondary market almost immediately.
• The primary market is an important source for mobilization of savings in an economy.

• Funds are mobilized from commoners for investing in other channels.

• It leads to monetary resources being put into investment options.

• The chances of price manipulation in the primary market are considerably less when compared to the
secondary market.
• Such manipulation usually occurs by deflating or inflating a security price, thereby deliberately interfering
with fair and free operations of the market.
• The primary market acts as a potential avenue for diversification to cut down on risk.
• It enables an investor to allocate his/her investment across different categories involving multiple financial
instruments and industries.

• It is not subject to any market fluctuations.

• The prices of stocks are determined before an initial public offering, and investors know the actual amount
they will have to invest.

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Disadvantages of Primary Market

• There may be limited information for an investor to access before investment in an IPO
• since unlisted companies do not fall under the purview of regulatory and disclosure requirements of the
Securities and Exchange Board of India.
• Each stock is exposed to varying degrees of risk, but there is no historical trading data in a primary market
for analyzing IPO shares because, the company is offering its shares to the public for the first time through
an initial public offering.
• In some cases, it may not be favorable for small investors. If a share is oversubscribed, small investors
may not receive share allocation.
Types OF PRIMARY MARKET
The primary market is generally classified into five types:
• Public Issue

• Follow-on-Public Issue

• Rights Issue

• Private Placement and

• Preferential Allotment.

1.Public Issue: Here, securities are issued to the general public. The public issue could be an Initial Public
Offer (IPO) or a Further Public Offer (FPO).
For example, the recent Paytm IPO, where the company offered its shares to the public through the primary
market, falls under this category.

2. Follow-on Public Offering (FPO): Companies already on the stock market sell more shares to the public
to get more money.

3.Rights Issue: Existing shareholders are offered additional shares in proportion to their current holdings.

4. Private Placement: The issuance of securities is made to select individuals or institutional investors.

5. Preferential Allotment: Similar to the private placement, the allotment is usually made to a select group of
investors, often at a preferential price.

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PLAYERS OF PRIMARY MARKET

1. Issuer: The issuer is the entity, such as a company or government, seeking to raise capital by issuing
new securities. They are the originators of the securities and are responsible for providing detailed financial
information to potential investors. The issuer can be a corporation, a government agency, or other
organizations.
2. Underwriter: Underwriters are typically investment banks or financial institutions that assist the issuer
in bringing the securities to the primary market. They play a critical role in facilitating the issuance process.
Underwriters purchase the securities from the issuer and then resell them to the public. They often assume
the risk of being unable to sell all the issued securities.
3. Registrar and Transfer Agent: These entities help maintain accurate records of shareholders and
facilitate the transfer of ownership of securities. They ensure that the securities are issued and transferred
properly to investors.
4. Regulatory Authorities: Regulatory authorities, such as the U.S. Securities and Exchange Commission
(SEC) in the United States, oversee and regulate primary market activities. They enforce disclosure
requirements and other regulations to protect investors and maintain market integrity.
5. Legal and Financial Advisors: Legal and financial advisors, including law firms, accountants, and
auditors, provide essential advice and services to the issuer during the issuance process. They help ensure
compliance with legal and financial regulations
6. Lead Manager/Lead Underwriter: In larger primary market offerings, there may be a lead manager
or lead underwriter who takes on a leadership role among underwriters. They coordinate the underwriting
syndicate and are responsible for pricing and marketing the securities.
7. Investors: Investors are the individuals or institutions that participate in the primary market by
purchasing the newly issued securities, Investors. can include retail investors, institutional investors,
mutual funds, and other financial entities.
8. Rating Agencies: Rating agencies, such as Standard & Poor's, Moody's, and Fitch Ratings, assess and
assign credit ratings to the securities being issued. These ratings provide an evaluation of the
creditworthiness of the issuer and help investors make informed decisions.
9. Stock Exchanges and Listing Authorities: In the case of equity securities, stock exchanges or listing
authorities play a role in the primary market by providing a platform for the initial listing and trading of
shares after the securities have been issued.
10. Legal and Regulatory Framework: The legal and regulatory framework governing primary market
activities is also a significant player. This includes securities laws, regulations, and market rules that set
the standards and requirements for issuers, underwriters, and other participants.

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INSTRUMENTS OF PRIMARY MARKET

1. Common Stock (Equity Shares): Common stock represents ownership in a corporation. When a
company issues common stock in the primary market, it is offering ownership stakes to investors.
Shareholders have voting rights and may receive dividends, but their claims on the company's assets are
subordinate to bondholders and preferred stockholders,
2. Preferred Stock: Preferred stock is another form of equity. Holders of preferred stock have a higher
claim on the company's earnings and assets than common stockholders. They typically receive fixed
dividends, but usually do not have voting rights. Preferred stock can be issued in the primary market.
3. Corporate Bonds: Companies issue bonds in the primary market to borrow money from investors.
Bonds represent a debt obligation, and bondholders receive periodic interest payments and the return of
the principal amount at maturity. Corporate bonds can have various maturities and interest rates.
4. Government Bonds: Governments, at various levels (federal, state, or municipal), issue bonds to
finance public projects or budget deficits. These bonds are considered low-risk because they are backed
by the taxing authority of the government. Examples include U.S. Treasury bonds and municipal bonds.
5. Municipal Bonds: Issued by state and local governments, municipal bonds are used to finance public
infrastructure projects. They offer tax advantages to investors.
6. Asset-Backed Securities (ABS): Asset-backed securities represent a pool of financial assets, such as
mortgages, auto loans, or credit card debt. These assets are bundled together and sold to investors. ABS
can be issued in the primary market.
7. Initial Public Offering (IPO): An IPO is the first sale of common stock by a company to the public. It
allows a privately-held company to become publicly traded, raising capital by issuing new shares to
investors.
8. Debentures: Debentures are unsecured debt instruments issued by corporations, typically with a
promise to repay the principal and interest. Unlike bonds, debentures are not backed by specific assets.
9. Convertible Securities: Convertible bonds or preferred stock can be converted into common stock at a
predetermined conversion price. These securities offer a combination of debt and equity features.
10. Warrants and Options: Warrants and options are derivative instruments that give the holder the right
to purchase the issuer's common stock at a predetermined price within a specified period. They are often
issued as part of other securities offerings.
11. Commercial Paper: Commercial paper is a short-term debt instrument issued by corporations to raise
working capital. It typically has maturities ranging from a few days to a few months.
12. Certificates of Deposit (CDs): Banks issue certificates of deposit in the primary market. CDs represent
a time deposit, where investors lend money to a bank for a fixed period in exchange for interest.

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Methods of floating new issue in primary market

 Initial Public Offering (IPO): A company can go public by offering shares to the general public for the
first time. This is often a complex and regulated process. Follow-on Public Offering: Companies that are
already public can issue additional shares to raise more capital. This is also known as a secondary
offering.
 Private Placement: Securities are sold to a select group of institutional or accredited investors rather than
the general public. This method may involve less regulatory scrutiny.
 Rights Issue: Existing shareholders are given the right to purchase additional shares at a discounted price,
allowing the company to raise capital from its current investors.
 Preferential Allotment: This involves issuing shares to a specific group of investors (usually existing
shareholders) at a preferential price.
 Book Building: Companies and underwriters determine the price of the securities by gauging investor
demand during a specified period. The final price is often determined based on the highest price investors
are willing to pay.
 Auction: In this method, securities are sold to the highest bidders. This can be used for debt or equity
offerings. Direct Listing: Instead of an IPO, some companies choose to directly list their shares on an
exchange, allowing existing shares to be traded openly.
 Crowdfunding: Small and startup companies may raise capital through online platforms, offering securities
to a large number of investors.
Problem of primary market
 Lack of Information: Investors in the primary market may have limited information about the issuing
company, making it difficult to assess the investment's potential.
 Pricing Uncertainty: Determining the initial offering price can be challenging, and if it's set too high, it
may deter investors, while setting it too low can result in missed opportunities for the issuing company.
 Underpricing: Companies often underprice their initial offerings to attract investors, which can lead to
missed revenue for the company.
 Regulatory Hurdles: Companies must comply with various regulatory requirements and disclosures,
which can be time-consuming and expensive.
 Market Conditions: The success of an IPO or bond issuance can be heavily influenced by broader market
conditions, which can be unpredictable.
 Lock-Up Periods: Founders and early investors may be subject to lock-up periods, restricting their ability
to sell their shares, potentially impacting market dynamics.

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 Allocation Bias: The allocation of shares in an IPO can sometimes be biased towards institutional investors,
leaving retail investors with limited access.
 Volatility: Newly issued securities in the primary market can experience significant price volatility in the
initial days of trading.
 Market Timing: The timing of an IPO or bond issuance can greatly impact its success, and companies may
not always choose the optimal time to go public.
 Market Reaction: How the market reacts to the new issuance can impact subsequent offerings and the
company's reputation.
II SECONDARY MARKET
Meaning of secondary market.
The secondary market refers to the financial market place where existing securities, such as stocks, bonds, and
other financial instruments, are bought and sold by investors.
It's distinct from the primary market, where new securities are issued.
In the secondary market, investors trade these securities among themselves, and the prices are determined by
supply and demand, as opposed to the initial offering price in the primary market.
STRUCTURE OF SECONDARY MARKET
1.Participants:
 Investors: Individuals, institutions, and traders who buy and sell securities.
 Brokers: Intermediaries who execute trades on behalf of investors.
 Exchanges: Physical or electronic platforms where securities are traded.
2.Instruments:
 Stocks: Ownership shares in a company Bonds: Debt securities issued by governments or corporations.
 Derivatives: Contracts based on the value of underlying assets.
3. Order Types:
▪ Market Orders: Execute immediately at the current market price.
 Limit Orders: Execute only at a specified price or better.
 Stop Orders: Trigger a market order when a certain price is reached.
4.Regulation:
 Oversight by government agencies to ensure fair and transparent trading.

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5.Transparency:
 Real-time price information available to participants.
 Regulatory requirements for reporting trades.
6.Liquidity:
 Higher liquidity attracts more participants and reduces bid-ask spreads.
 Liquidity varies by security and market conditions.

7.Market Makers:
 Entities that facilitate trading by providing continuous bid and ask prices.
 Improve liquidity by buying and selling securities.
8.Clearing and Settlement:
 Post-trade processes to ensure the transfer of securities and funds.
 Reduces counterparty risk.
9.Electronic Trading:
 Increasingly common, with exchanges and alternative trading systems operating online.

10.Trading Hours:
 Typically follow specific schedules and may vary by market and region.
11.Market Indices:
 Represent the performance of a group of securities in the market.
 Used as benchmarks to assess overall market health.

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FUNCTIONS OF SECONDARY MARKET /STOCK MARKET

1. Provide liquidity to investors - It allows investors to easily buy and sell securities, converting them into
cash when needed. This liquidity makes it more attractive for investors to participate in the primary market
(where new securities are issued) since they know they can sell their investments later.
2. Price Discovery: The secondary market is where the market price of securities is determined. The
interaction of buyers and sellers in this market establishes the fair market value of assets. This price
discovery mechanism reflects the collective assessment of market participants regarding a security's worth.
3.Risk Reduction: Investors can use the secondary market to reduce their exposure to risk. They can sell their
holdings in response to changing market conditions, news, or individual financial circumstances, which helps
manage and mitigate risk.
4.Capital Allocation: The secondary market plays a role in efficient capital allocation. It allows investors to
reallocate their capital from underperforming assets to those they believe offer better prospects,
contributing to the efficient allocation of resources in the economy. Information
5.Dissemination: Through the secondary market, information about companies and their securities is
continuously processed and disseminated. This information is crucial for investors and can affect their
trading decisions.
6.Facilitation of Investment Strategies: Investors can use the secondary market to implement various
investment strategies, such as day trading, long-term investing, or portfolio diversification. The availability
of a secondary market makes these strategies feasible.
7.Access to Diverse Securities: The secondary market offers access to a wide range of securities, including
stocks, bonds, options, and derivatives. This diversity allows investors to tailor their portfolios to meet
specific investment goals and risk tolerances.
8.Capital Formation: Although the primary market is where companies raise capital by issuing new
securities, the secondary market indirectly supports this process. A liquid and active secondary market can
make a stock more attractive to investors, which may encourage companies to issue more securities.
9.Arbitrage Opportunities: Traders in the secondary market can take advantage of price differences between
various markets or between different securities. This helps ensure that prices remain relatively consistent
across different trading venues.
10.Market Efficiency: The secondary market, by allowing investors to react quickly to new information,
contributes to market efficiency. Efficient markets incorporate available information into asset prices,
reflecting fundamental values more accurately.
Overall, the secondary market plays a vital role in the broader financial ecosystem by providing liquidity, price
discovery, risk management, and opportunities for investors to meet their financial objectives

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 Market Participants In Stock Market

1. Individual Investors: Individual investors are private individuals who invest their personal capital in
various financial instruments like stocks, bonds, mutual funds, and real estate. They typically have diverse
investment goals, ranging from wealth accumulation to retirement planning. Individual investors may vary
widely in their risk tolerance, investment strategies, and financial knowledge.
2. Institutional Investors: Institutional investors are organizations that invest large sums of money on behalf
of others. They include:
• Mutual Funds: These pool money from many investors to invest in a diversified portfolio of stocks,
bonds, or other securities.
• Pension Funds: These manage investments to provide retirement income for employees.
• Insurance Companies: They invest premiums collected from policyholders to generate returns and meet
future claim obligations.
3. Brokers: Stockbrokers are licensed entities who connect investors to the financial markets. They play a
pivotal role in buying and selling stocks for individual and institutional investors.
4. Regulators: Regulators, such as SEBI in India, supervise financial markets to guarantee transparent, fair,
and lawful operations. These regulators not only set market guidelines but also conduct audits and
implement measures to counteract fraud and ensure market stability. Their primary objective is to shield
investors and uphold the integrity of the market.
5. Clearing Corporation: This organization, linked with a stock exchange, manages the verification,
completion, and transfer of stocks. Essentially, it ensures smooth buying and selling processes on either
side of a deal
 Merits (Advantages) of the Secondary Market:
1. Liquidity: The secondary market provides liquidity to investors by offering a platform to buy and sell
previously issued securities, making it easier for investors to convert their investments into cash when
needed.
2. Price Discovery: Secondary markets play a crucial role in determining the fair market price of securities.
The forces of supply and demand in these markets help establish the true value of assets.
3. Market Efficiency: Secondary markets promote market efficiency by allowing investors to adjust their
portfolios and react to new information quickly. This, in turn, contributes to overall economic efficiency.
4. Diversification: Investors can diversify their portfolios in the secondary market by buying different types
of securities, thereby spreading risk and potentially improving returns.

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5. Accessibility: The secondary market is accessible to a wide range of investors, from individual retail
investors to institutional investors, allowing for broad market participation.

 Demerits (Disadvantages) of the Secondary Market:

1. Volatility: Secondary markets can experience high levels of price volatility, especially for stocks and other
highly traded securities. This can lead to significant price fluctuations in a short period, which may not be
suitable for risk-averse investors.
2. Speculation: Investors in the secondary market may engage in speculative activities, buying and selling
based on short-term price movements rather than long-term fundamentals. This can result in market
bubbles and excessive speculation.
3. Brokerage Fees: Trading in the secondary market often involves brokerage fees, transaction costs, and
taxes, which can reduce an investor's overall return on investment.
4. Insider Trading: Insider trading, or the unfair advantage gained by individuals with non-public
information, can occur in secondary markets and can undermine market integrity.
5. Market Manipulation: The secondary market is vulnerable to market manipulation and fraudulent
activities, which can have negative consequences for both individual investors and the market as a whole.
6. Lack of New Capital for Companies: While the secondary market provides liquidity for existing
shareholders, it does not provide new capital for the issuing companies. New capital is typically raised in
the primary market through initial public offerings (IPOs).
 Here are some common methods used in the stock market:

1. Fundamental Analysis: Fundamental analysis involves evaluating a company's financial health,

including its earnings, revenue, debt, and other financial metrics. Analysts also assess a company's
industry, competition, and macroeconomic factors to determine the intrinsic value of its stock.
2. Technical Analysis: Technical analysis relies on the study of historical price and volume data to
identify patterns, trends, and potential price movements. It uses charts and technical indicators like
moving averages, RSI (Relative Strength Index), and MACD (Moving Average Convergence
Divergence) to make trading decisions.
3. Value Investing: Value investors seek undervalued stocks trading below their intrinsic value. They
often focus on financial metrics like price-to-earnings (P/E) ratios, price-to-book (P/B) ratios, and
dividend yields to identify investment opportunities.

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4. Growth Investing: Growth investors target companies with strong earnings and revenue growth
potential. They are willing to invest in stocks with higher P/E ratios, betting that the companies will
continue to grow rapidly.
5. Dividend Investing: Dividend investors prioritize stocks that pay regular dividends. They aim to
generate income from their investments and may also benefit from potential capital appreciation.
6. Momentum Investing: Momentum investors buy stocks that have shown recent strong price
performance. They believe that trends will continue in the short term and try to profit from quick price
movements.
7. Contrarian Investing: Contrarian investors go against the crowd, looking for opportunities in stocks
that are undervalued or oversold according to their analysis. They believe that the market often
overreacts to news and events.
8. Buy and Hold: Buy and hold investors take a long-term perspective, often holding onto stocks for
many years or even decades. They believe that, over time, the stock market tends to rise, and short-
term fluctuations are less important.
9. Day Trading: Day traders buy and sell stocks within the same trading day, trying to profit from short-
term price movements. This method requires constant monitoring and quick decision-making.
10.Swing Trading: Swing traders aim to profit from short- to medium-term price swings, typically holding
positions for several days or weeks. They often use technical analysis to time their trades.
11. Options and Derivatives Trading: Options and derivatives trading involve using financial derivatives
like options and futures contracts to speculate on the price movements of underlying stocks or indices.
This method can be highly leveraged and comes with increased risk.
12.Sector Rotation: Sector rotation involves shifting investments among different sectors of the economy
based on economic and market conditions. Investors may favor sectors that are expected to outperform
in a given economic environment.

The recognition of stock markets typically involves several key aspects:

1. Regulatory Authority: Stock markets are usually regulated by government agencies or
independent regulatory bodies. These authorities oversee market operations, enforce rules and regulations,
and ensure that market participants adhere to the established standards. In the United States, for example,
the U.S. Securities and Exchange Commission (SEC) plays a central role in regulating and recognizing
stock markets.
2. Listing Requirements: Stock exchanges establish specific listing requirements that companies
must meet to have their securities traded on the exchange. These requirements often involve financial and

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governance standards, such as minimum capitalization, financial reporting, and corporate governance
practices.
3. Market Rules and Regulations: Stock markets have their own set of rules and regulations
governing trading, disclosure, and conduct. These rules are designed to maintain market integrity, protect
investors, and promote fair and transparent trading practices.
4. Market Surveillance: Stock exchanges employ market surveillance mechanisms to monitor
trading activities for irregularities and potential market manipulation. This includes monitoring trading
volumes, price movements, and unusual trading patterns.
5. Investor Protection: Recognized stock markets often provide investor protection mechanisms,
such as insuring client funds held by brokerages and enforcing rules that safeguard investors against
fraudulent or unethical practices.
6. Market Transparency: Stock markets are expected to provide transparent information on listed
companies, including financial disclosures, earnings reports, and news updates. This information is crucial
for investors to make informed decisions.
7. Market Infrastructure: Recognized stock markets have advanced trading infrastructure,
including electronic trading platforms, clearing and settlement systems, and secure custody of securities.
This infrastructure ensures efficient and secure trading operations.
8. Investor Protection: Recognized stock markets often provide investor protection mechanisms,
such as insuring client funds held by brokerages and enforcing rules that safeguard investors against
fraudulent or unethical practices.
9. Transparency: Stock markets are expected to provide transparent information on listed
companies, including financial disclosures, earnings reports, and news updates. This information is crucial
for investors to make informed decisions.
10. Market Infrastructure: Recognized stock markets have advanced trading infrastructure,
including electronic trading platforms, clearing and settlement systems, and secure custody of securities.
This infrastructure ensures efficient and secure trading operations.
11.Corporate Governance: Stock exchanges often encourage or require listed companies to adhere to
good corporate governance practices, which help protect the interests of shareholders and maintain market
credibility.
12.Market Access: Stock markets provide market access to various types of investors, including
institutional investors, retail investors, and foreign investors. These markets are accessible through
brokerage firms, investment accounts, and online trading platforms.
13.Market Promotion and Education: Recognized stock markets often engage in educational and
promotional activities to raise awareness about investing, market operations, and the benefits of
participating in the financial markets.

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  Functions of Stock Exchanges (BSE, NSE, and OTCEI):
1. Listing of Securities: Stock exchanges facilitate the listing of securities, allowing companies to issue and
have their stocks or bonds publicly traded. This provides companies with access to capital and allows
investors to buy and sell these securities.
2. Trading: Stock exchanges are primary trading platforms where buyers and sellers come together to trade
securities. They provide a marketplace where orders are matched and executed. Trading can occur through
various methods, including electronic trading, open-outcry, and auctions.
3. Price Discovery: Stock exchanges help in price discovery by continuously updating and displaying the
prices at which securities are being bought and sold. This information is vital for investors to determine the
fair market value of securities.
4. Market Regulation: Stock exchanges establish and enforce rules and regulations that govern trading
activities and market participants. These rules help maintain market integrity, transparency, and investor
protection.
5. Market Surveillance: Stock exchanges monitor trading activities to detect irregularities and potential
market manipulation. Surveillance mechanisms track trading volumes, price movements, and unusual
trading patterns.
6. Market Data Dissemination: Stock exchanges provide real-time market data to investors, financial
institutions, and the public. This data includes information on stock prices, trading volumes, indices, and
corporate announcements.
 Trading and Settlement Procedure in the Stock Market:
1. Trading: Investors place buy and sell orders through brokerage firms or online trading platforms. These
orders can be market orders (executed at the prevailing market price) or limit orders (executed when the
price reaches a specified limit).
2. Matching of Orders: Stock exchanges match buy and sell orders based on price and time priority. Orders
are typically matched through an electronic order matching system, ensuring fair and transparent
execution.
3. Clearing and Settlement: After trades are executed, the clearing and settlement process begins. This
involves verifying trade details, calculating obligations, and ensuring that the buyer receives the securities
and the seller receives the payment.
4. T+2 Settlement: In India, the settlement cycle for equities and most derivatives is typically T+2, which
means that trades are settled two business days after the trade date. Settlement involves the delivery of
shares and payment of funds through clearinghouses and depository participants.
5. Risk Management: Stock exchanges implement risk management measures to mitigate counterparty risk.
This includes margin requirements and mechanisms for handling defaults.

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6. Market Surveillance: Stock exchanges conduct ongoing surveillance to monitor and investigate any
unusual trading activity, ensuring market integrity and investor protection.
 Here are the general steps and requirements for listing securities on a stock market:
1. Select the Stock Exchange: The issuing company must decide on the stock exchange where it wants to
list its securities. Different exchanges have varying listing requirements and market characteristics.
2. Meet Listing Criteria: Each stock exchange sets specific listing criteria that a company must meet. These
criteria typically include financial, governance, and disclosure requirements. Common criteria may include
minimum capitalization, earnings history, corporate governance standards, and adherence to accounting
and auditing standards.
3. Prepare a Prospectus: The issuing company is required to prepare a prospectus or an offering document
that provides detailed information about the company, its financials, operations, and the securities being
offered. This document is submitted to the stock exchange for review and approval.
4. Due Diligence: The stock exchange, or its regulatory authority, conducts a due diligence process to ensure
that the company and its securities meet the listing requirements. This process may involve a review of the
company's financial statements, corporate governance practices, and adherence to relevant regulations.
5. Listing Application: The company submits a formal listing application to the stock exchange. This
application includes the prospectus, relevant corporate documents, and information required by the
exchange.
6. Approval: If the stock exchange's listing committee or regulatory authority is satisfied that the company
and its securities meet the requirements, they will grant approval for the securities to be listed.
7. Trading Commencement: Once approval is granted, the securities are officially listed on the exchange,
and trading can begin. Investors can buy and sell the listed securities through brokers and on the exchange.
8. Ongoing Compliance: After listing, the issuing company is required to continue adhering to the
exchange's ongoing compliance requirements, which may include regular financial reporting, corporate
governance standards, and timely disclosure of material information.
9. Market Making: In some cases, especially for smaller or less liquid securities, market makers or
designated market makers may be appointed to facilitate trading by providing bid and ask prices and
maintaining liquidity.
 It's important to note that each stock exchange may have its own specific listing requirements and
procedures. For example, the New York Stock Exchange (NYSE) and NASDAQ in the United States have
different requirements and procedures for listing compared to exchanges in other countries.
 Here is an overview of the trading and settlement procedures in the stock market:
 Trading:
a. Order Placement: Investors place orders to buy or sell securities through brokerage firms, either via
phone, online trading platforms, or by contacting their brokers directly.

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b. Order Types: Investors can place different types of orders, including market orders (executed at the
current market price) and limit orders (executed at a specified price or better). Other order types, like stop orders,
are also used to trigger trades at specific conditions.
c. Matching of Orders: Stock exchanges use electronic order matching systems to match buy and sell orders
based on price and time priority. When a buy order is matched with a corresponding sell order, a trade is executed.
d. Continuous Trading: Most stock exchanges offer continuous trading sessions during regular market
hours, allowing investors to submit orders and execute trades throughout the trading day.
e. Circuit Breakers: In some markets, circuit breakers may be in place to temporarily halt trading in the
event of excessive price fluctuations or market stress to prevent panic selling or buying.
2. Approval: If the stock exchange's listing committee or regulatory authority is satisfied that the company
and its securities meet the requirements, they will grant approval for the securities to be listed.
3. Trading Commencement: Once approval is granted, the securities are officially listed on the exchange,
and trading can begin. Investors can buy and sell the listed securities through brokers and on the exchange.
4. Ongoing Compliance: After listing, the issuing company is required to continue adhering to the
exchange's ongoing compliance requirements, which may include regular financial reporting, corporate
governance standards, and timely disclosure of material information.
5. Market Making: In some cases, especially for smaller or less liquid securities, market makers or
designated market makers may be appointed to facilitate trading by providing bid and ask prices and maintaining
liquidity.
Problem faced by stock market or secondary market:
 Market Volatility: Fluctuations in stock prices can be significant, influenced by global events, economic
indicators, and geopolitical factors.
 Regulatory Changes: Changes in regulations and policies by government authorities can impact market
dynamics and investor sentiment.
 Liquidity Concerns: Some stocks may lack liquidity, making it challenging for investors to buy or sell
shares at desired prices.
 Corporate Governance Issues: Instances of corporate fraud, insider trading, or poor governance can erode
investor confidence and affect stock prices.
 Global Economic Factors: Economic developments in major global economies can have spillover effects
on the Indian stock market.
 Interest Rate Fluctuations: Changes in interest rates can impact stock prices and investor behavior.Foreign
Institutional Investor (FII) Influence: Fluctuations in foreign fund inflows and outflows can affect market
movements.
 Currency Fluctuations: Exchange rate variations can impact companies engaged in international trade,
influencing their stock performance.

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 Macro-Economic Indicators: Factors like inflation, GDP growth, and unemployment rates can influence
investor sentiment and market trends.
 Technology and Cybersecurity Risks: With increasing reliance on technology, the market is susceptible
to cyber threats and technological disruptions.
 Market Manipulation: Instances of market manipulation, insider trading, or fraudulent activities can pose
challenges to market integrity.
It's important for investors to be aware of these factors and conduct thorough research before making investment
decisions in the Indian stock market.

Objectives of Stock Exchange

 1. To supply capital: The main function of a stock exchange is to help companies elevate money. It is
established to supply the required capital for companies of a country. To achieve this task, ownership in a
private corporation is sold to the public in the form of shares of stock. Funds received from the sale of stock
contribute to the firm’s capital formation.
 2. To inspire savings: This inspires people to save their income by making a profit. A stock exchange helps
in determining the prices for various securities. Continuous purchase and sale of securities on a stock exchange
led to the evaluation of their prices. Regular dealings reduce wide fluctuations in prices. It accumulates the
individual income and yet they go to the industries to the economic development of a country.
 3. To trade financial instruments: It is established to trade the financial instruments for individual
investment and company collect capital. It provides a regular meeting place where people can convert their
money into securities and securities into money. Buying and selling of securities are confined to one particular
place and the investors are saved the trouble of going to different places to buy or sell securities.
 4. To develop economy: It helps economic development by supplying the capital to the industries.
Unregulated markets can have an unenthusiastic impact on capital formation. Close regulation of stock
exchanges allows strangers from all parts of the world to honor contracts executed in the daily trading of
shares. It is an important objective of the stock exchange.
 5. To present information: Another objective of the stock exchange is to present information about
transactions and financial conditions of the companies. It reflects changes taking place in the country’s
economy. Price trends on stock exchange indicate trade cycles i.e. boom, recession, depression, recovery, etc.
 6. To do long-term financing: Commercial banks generally disburse the short-term loan. So, supplying
long-term finance is an objective of the stock exchange. Any company which wants to get its securities listed
has to submit to these rules and regulations.
 7. To raise awareness: It raises awareness among the general people by giving information than to invest
and gain profit from the market. Thus, stock exchanges exercise a healthy influence on the working and
management of companies.

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 8. To have a fair operation: To transact the financial instruments easily and fairly stock exchange is
established. A stock exchange channelizes the investible funds in more productive industries. A company with
better performance and prospects has no difficulty in raising its capital. So, it is a duty of stock exchange to
secure both investors and borrower.
 9. To protect fraudulently: It is also to ensure that no fraudulence occurs in a transaction. A stock exchange
functions exactingly according to established rules and regulations. These rules and regulations provide a
check on overtrading in securities and manipulation of prices. The Government, too; exercises supervision
and control over a stock exchange. By this means the evils can deceit the tender investors and the stock are
liable for protecting that.
 10. Convenience: The objective of the stock exchange is to formulate policies for easy transactions and the
safety of the investors and companies. A stock exchange informs investors which way the investment wind is
blowing. By directing the flow of capital into worthwhile projects, it gives an impetus to the economic
development of the country.
 11. Security and Transparency: The lawful sale of stock on any exchange requires dependable and correct
information. By requiring a high level of transparency from all trading companies, the stock exchange creates
a more protected environment for investors, which helps them to verify the risks of investing.
So, the objectives of the stock exchange are great and efficient operations of stock exchange are so much required
for the economic development of a country
Functions of SEBI:
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.

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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 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:
1. Training of intermediaries who are a part of the security market.
2. Introduction of trading through electronic means or through the internet by the help of registered stock brokers.
3. By making the underwriting an optional system in order to reduce cost of issue.

Difference between Primary market and Secondary market

Primary market Secondary market

• New issue of securities is debt in primary • Existing securities are dealt in secondary
market. market.

• In primary market securities are exchange • Securities are exchanged between investors.
between company’s and investors.

• Primary market promotes capital formation • Secondary market promotes capital formation
directly. indirectly.

• The prices of securities dealt in the primary • In the secondary market securities are bought
market are determined by the management of and sold any number of times.
issuing companies.

• Primary market securities are issued to • Price determined by the demand and the
investors for the first time. supply of securities.

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RECOGNISED STOCK EXCHANGE OF INDIA: -

Bombay Stock Exchange (BSE)

National Stock Exchange of India (NSE)
Calcutta Stock Exchange (CSE)
Bangalore Stock Exchange (Bg SE)
Madras Stock Exchange (MSE)
Union Stock Exchange of India (USE)
Multi Commodity Exchange (MCX)

Bhubaneswar Stock Exchange (BhSE)

Cochin Stock Exchange
Hyderabad Stock Exchange (HSE)
Calcutta Stock Exchange (CSE)
Delhi Stock Exchange (DSE)
Banga Stock Exchange (BgSE)
Madi Pradesh Stock Exchange, Indore
Jaipur Stock Exchange (JSE)
Magadh Stock Exchange, Patna
UP Stock Exchange (UPSE)
Vajim Stock Exchange, Vadodara (VSE)
Guwahati Stock Exchange Ltd
Ludhiana Stock Exchange Association Ltd
Khanam Stock Exchange Ltd
Mangalore Stock Exchange Ltd
Pune Stock Exchange Ltd
Saurashtra Kutch Stock Exchange Ltd
Meerut Stock Exchange Ltd
Interred Trade Exchange Ltd

DERIVATIVE: -
The term Derivative ‘stands for a contract whose price is derived from or is dependent upon an underlying
asset. The underlying asset could be a financial asset such as currency, stock and market index, an interest-
bearing security or a physical commodity. As Derivatives are merely contracts between two or more parties,
anything like weather data or amount of rain can be used as underlying assets.

The derivatives market performs a number of economic functions.

They help in: Transferring risks Discovery of future as well as current prices Catalyzing entrepreneurial
activity Increasing saving and investments in long run. Need for Derivatives

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Hedgers use futures or options markets to reduce or eliminate the risk associated with price of an asset.

Speculators use futures and options contracts to get extra leverage in betting on future movements
in the price of an asset.
Arbitrageurs are in business to take advantage of a discrepancy between prices in two different markets.
Participants in Derivative markets

Over the Counter (OTC) derivatives are those which are privately traded between two parties and
involves no exchange or intermediary. Non-standard products are traded in the so-called over-
the-counter (OTC) derivatives markets. The Over-the-counter derivative market consists of the
investment banks and include clients like hedge funds, commercial banks, government sponsored
enterprises etc.

Exchange Traded Derivatives Market

A derivatives exchange is a market where individuals trade standardized contracts that have been defined by the
exchange. A derivatives exchange acts as an intermediary to all related transactions, and takes initial margin
from both sides of the trade to act as a guarantee

(Chapter 1)
Structure/types/components of Indian financial system

Here are some key types or components of a financial system:

1. Financial Institutions:
• Banks: Commercial banks, central banks, cooperative banks, etc.
• Non-Banking Financial Institutions (NBFI): Insurance companies, pension funds, mutual funds,
and other entities providing financial services but not classified as banks.
2. Financial Markets:
• Money Market: Deals with short-term borrowing and lending.
• Capital Market: Involves long-term financial instruments like stocks and bonds. Foreign
Exchange Market: Deals with the trading of currencies.
3. Financial Instruments:
• Equities (Stocks): Represent ownership in a company. Bonds: Debt securities representing
loans to governments or corporations.
• Derivatives: Financial contracts derived from an underlying asset.
4. Regulatory Authorities:
• Central Banks: Responsible for monetary policy and financial stability.

• Securities and Exchange Commissions: Regulate securities markets.

• Insurance Regulatory Bodies: Oversee the insurance industry.

• Payment and Settlement Systems: Payment Banks and Wallets: Facilitate digital transactions.
• Clearing Houses: Ensure the smooth settlement of financial transactions. Financial Services:

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5. Insurance Services: Covering life, health, and general insurance.

• Pension Funds: Managing retirement savings.
• Investment Services: Offered by asset management companies and investment banks.
• Government Finance: Treasury Departments: Manage government finances and debt.
6. Financial Infrastructure/services:
• Credit Rating Agencies: Assess and rate the creditworthiness of issuers of financial instruments.
• Asset management companies (AMCs): Managing mutual funds.
• Technology and Information Systems: Supporting electronic banking, trading platforms, and
financial information dissemination.
• Microfinance Institutions: Provide financial services to small-scale entrepreneurs and low
income

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