Module :4

Secondary Market and regulatory Authority

secondary market and regulatory authorities

The secondary market refers to the marketplace where previously issued financial
instruments, such as stocks and bonds, are bought and sold. Unlike the primary market, where
new securities are created and sold to investors, the secondary market allows investors to
trade existing securities, providing liquidity and price discovery.

Key Functions of the Secondary Market:

1. Liquidity: It allows investors to sell their securities, making it easier to enter or exit
investments.
2. Price Discovery: The continuous buying and selling process helps establish the
market price of securities based on supply and demand.
3. Efficient Allocation of Resources: It helps in allocating capital to its most productive
uses by enabling investors to buy and sell easily.

Regulatory Authorities

Regulatory authorities oversee and regulate the secondary market to ensure fair practices,
transparency, and the protection of investors. Key regulatory bodies include:

1. Securities and Exchange Commission (SEC) (U.S.): The SEC is responsible for
enforcing federal securities laws, regulating the securities industry, and protecting
investors.
2. Financial Industry Regulatory Authority (FINRA) (U.S.): A self-regulatory
organization that oversees brokerage firms and exchange markets to ensure fair and
honest trading.
3. European Securities and Markets Authority (ESMA) (EU): An independent
authority that enhances investor protection and promotes stable, orderly financial
markets in the EU.
4. Financial Conduct Authority (FCA) (UK): Regulates financial firms providing
services to consumers and maintains the integrity of the UK’s financial markets.
5. International Organization of Securities Commissions (IOSCO): An international
body that brings together the world’s securities regulators to establish standards and
promote cooperation among regulators.

Key Regulatory Functions:

 Market Surveillance: Monitoring trading activities to detect and prevent fraudulent

practices, insider trading, and market manipulation.
 Disclosure Requirements: Mandating that companies provide accurate and timely
information to investors, helping them make informed decisions.
  Licensing and Oversight: Ensuring that market participants, such as brokers and
dealers, meet certain qualifications and adhere to regulatory standards.
 Enforcement Actions: Investigating and prosecuting violations of securities laws to
protect investors and maintain market integrity.

Understanding the dynamics of the secondary market and the role of regulatory authorities is
crucial for investors and market participants to navigate the complexities of financial
markets.

stock exchange and its functions

A stock exchange is a centralized marketplace where securities, such as stocks and bonds, are
bought and sold. It plays a crucial role in the financial system by facilitating the trading of
securities and providing a platform for companies to raise capital. Here are the key functions
of a stock exchange:

Key Functions of a Stock Exchange

1. Facilitating Trade: Stock exchanges provide a structured environment where buyers

and sellers can trade securities. This process involves matching orders, ensuring that
transactions occur in an orderly manner.
2. Price Discovery: Through the interactions of buyers and sellers, stock exchanges help
determine the market price of securities. This process reflects the collective opinions
of market participants regarding the value of a company.
3. Liquidity: Exchanges provide liquidity by enabling investors to easily buy and sell
shares. This liquidity helps ensure that investors can enter or exit positions without
significantly affecting the security’s price.
4. Raising Capital: Companies can list their shares on a stock exchange to raise capital
from investors. This process, known as an Initial Public Offering (IPO), allows
companies to access funds for growth and expansion.
5. Transparency and Regulation: Stock exchanges are typically regulated by
governmental or independent authorities, which ensures that trading practices are fair
and transparent. This includes enforcing disclosure requirements for listed companies.
6. Market Information: Exchanges provide essential information, including stock
prices, trading volumes, and other market data. This information helps investors make
informed decisions.
7. Investor Protection: By adhering to strict regulatory standards, stock exchanges help
protect investors from fraud and manipulation. They often have mechanisms in place
for dispute resolution and ensuring fair treatment.
8. Facilitating Derivative Trading: Many stock exchanges also provide a platform for
trading derivatives, such as options and futures, which are financial contracts based on
the value of underlying assets.
Examples of Major Stock Exchanges

 New York Stock Exchange (NYSE): One of the largest and most well-known
exchanges in the world, based in the United States.
 NASDAQ: A global electronic marketplace for buying and selling securities, known
for its technology and growth-oriented companies.
 London Stock Exchange (LSE): A major global exchange located in the UK,
featuring a diverse range of listed companies.
 Tokyo Stock Exchange (TSE): The largest stock exchange in Japan, home to many
well-known Japanese companies.

Conclusion

Stock exchanges play a vital role in the global economy by facilitating the trading of
securities, providing a platform for capital raising, and promoting transparency and efficiency
in financial markets. Understanding their functions is essential for investors and businesses
alike.

Recognition of Stock exchange

The recognition of a stock exchange refers to the official acknowledgment by regulatory
authorities that a particular exchange operates according to specific standards and regulations.
This recognition is crucial for the exchange to function effectively within the financial system
and instills confidence among investors and market participants. Here are some key aspects
of stock exchange recognition:

Key Aspects of Stock Exchange Recognition

1. Regulatory Approval: A stock exchange must receive authorization from relevant

government or regulatory bodies. In the U.S., for example, this involves registration
with the Securities and Exchange Commission (SEC). In other countries, similar
regulatory authorities oversee the process.
2. Compliance with Standards: Recognized exchanges must comply with a set of
operational and regulatory standards, including transparency, fair trading practices,
and robust risk management systems. This compliance helps protect investors and
maintain market integrity.
3. Listing Requirements: For a stock exchange to be recognized, it often needs to
establish clear listing requirements that companies must meet to be traded on the
exchange. These requirements may include minimum market capitalization, financial
reporting standards, and corporate governance practices.
4. Market Surveillance: A recognized exchange typically has mechanisms in place for
market surveillance to monitor trading activities and prevent manipulative or
fraudulent practices. This oversight helps maintain trust in the market.
5. Investor Protection Mechanisms: Recognized exchanges implement systems to
protect investors, such as providing information about companies, ensuring accurate
disclosures, and having procedures for addressing grievances and disputes.
 6. International Standards: Many recognized exchanges strive to adhere to
international standards set by organizations like the International Organization of
Securities Commissions (IOSCO), which promotes consistent and effective regulation
across global financial markets.
7. Continuous Monitoring: Regulatory authorities continuously monitor recognized
exchanges to ensure ongoing compliance with laws and regulations. This may involve
periodic audits, inspections, and assessments of trading practices.
8. Reputation and Trust: Recognition enhances the credibility of a stock exchange,
attracting more companies to list and more investors to trade. A well-recognized
exchange is often viewed as a safer and more reliable place for transactions.

Conclusion

The recognition of a stock exchange is vital for its operation, as it establishes a framework for
governance, transparency, and investor protection. This acknowledgment not only supports
the functioning of the exchange itself but also contributes to the overall stability and integrity
of the financial markets in which it operates.

Organization of Stock exchange in India

The organization of stock exchanges in India involves a structured framework that includes
various exchanges, regulatory bodies, and market participants. Here’s an overview of the key
components:

Major Stock Exchanges in India

1. Bombay Stock Exchange (BSE):

o Established in 1875, BSE is the oldest stock exchange in Asia.
o It operates under the regulatory framework set by the Securities and Exchange
Board of India (SEBI).
o The BSE has a wide range of listed companies and offers various financial
products, including equities, derivatives, and mutual funds.
2. National Stock Exchange (NSE):
o Founded in 1992, NSE is the largest stock exchange in India by trading
volume.
o It introduced electronic trading to India, significantly improving market
efficiency.
o NSE offers a diverse range of products, including equities, derivatives, and
fixed-income instruments.

Regulatory Authority

 Securities and Exchange Board of India (SEBI):

o SEBI is the primary regulatory body for securities markets in India.
o Established in 1992, it is responsible for protecting investor interests,
promoting the development of the securities market, and regulating its
functioning.
 o SEBI formulates regulations for stock exchanges, monitors trading activities,
and ensures compliance with laws.

Other Key Components

1. Depositories:
o National Securities Depository Limited (NSDL) and Central Depository
Services Limited (CDSL) are the two main depositories in India.
o They facilitate the holding and transfer of securities in electronic form,
ensuring smooth settlement of trades.
2. Clearing Corporations:
o Clearing corporations, such as the National Clearing Corporation Limited
(NCCL), act as intermediaries between buyers and sellers, ensuring the
settlement of trades and reducing counterparty risk.
3. Market Participants:
o Brokers: Individuals or firms that buy and sell securities on behalf of
investors.
o Institutional Investors: Entities like mutual funds, insurance companies, and
pension funds that invest large amounts in the market.
o Retail Investors: Individual investors who participate in the stock market
through direct or indirect means.

Market Structure

 Primary Market: Involves the issuance of new securities through Initial Public
Offerings (IPOs) and other methods.
 Secondary Market: Involves the buying and selling of existing securities on stock
exchanges.

Conclusion

The organization of stock exchanges in India is supported by a robust regulatory framework,

with SEBI playing a critical role in maintaining market integrity and investor protection. The
BSE and NSE serve as the primary platforms for trading, while depositories and clearing
corporations enhance the efficiency and reliability of the market. This structured approach
has contributed to the growth and development of the Indian securities market.

stock broker and its registration

A stock broker is a professional who buys and sells securities on behalf of clients. They can
work for brokerage firms or operate independently. Here's a brief overview of their
registration and licensing process:

1. Educational Requirements
  Typically, a bachelor’s degree in finance, economics, or a related field is required.

2. Examinations

 Brokers must pass certain exams to be licensed. In the U.S., the most common ones
include:
o Securities Industry Essentials (SIE) Exam: A foundational exam for
prospective securities industry professionals.
o Series 7 Exam: Allows brokers to sell a wide range of securities.
o Series 63 or Series 66 Exam: Required for state registration, focusing on
state securities regulations.

3. Registration with FINRA

 In the U.S., brokers must register with the Financial Industry Regulatory Authority
(FINRA). This involves:
o Submitting Form U4, which includes personal information and background
checks.
o Meeting continuing education requirements.

4. State Registration

 Brokers must also register in each state where they conduct business. This may
involve additional exams and paperwork.

5. Ongoing Compliance

 Registered brokers must adhere to regulatory requirements, including reporting,

compliance training, and ethical standards.

6. Additional Certifications

 Brokers may pursue additional certifications (like CFA or CFP) to enhance their
credentials and marketability.

Overall, becoming a stock broker involves a combination of education, examinations, and

adherence to regulatory standards to ensure they can effectively serve their clients.

Functions of Brokers
Brokers play several crucial roles in the financial markets. Here are the primary functions
they serve:

1. Facilitating Transactions
  Brokers execute buy and sell orders for clients, helping them trade stocks, bonds, and
other securities.

2. Providing Market Information

 They offer insights and analyses about market trends, stock performance, and
economic indicators, helping clients make informed decisions.

3. Advising Clients

 Brokers often provide personalized investment advice based on a client's financial

goals, risk tolerance, and investment horizon.

4. Research and Analysis

 Many brokers conduct detailed research on various securities and sectors, offering
reports that help clients understand potential investments.

5. Portfolio Management

 Some brokers assist clients in managing their investment portfolios, rebalancing

assets, and implementing strategies to achieve financial objectives.

6. Executing Complex Trades

 Brokers handle more sophisticated transactions, such as options trading, short selling,
and margin trading.

7. Ensuring Compliance

 They ensure that all transactions comply with regulatory requirements and industry
standards, protecting both the broker and the client.

8. Providing Custodial Services

 Brokers often hold clients’ assets and securities in custody, ensuring their safety and
proper record-keeping.

9. Offering Access to Investment Products

 Brokers give clients access to a wide range of investment products, including mutual
funds, ETFs, bonds, and alternative investments.

10. Education and Resources

 Many brokers provide educational resources and tools to help clients understand
investing, market strategies, and financial planning.
Overall, brokers act as intermediaries between buyers and sellers, providing a range of
services to enhance the investment experience.

kinds of Brokers and its Assistants in stock market

In the stock market, various types of brokers and their assistants serve distinct roles. Here’s
an overview of the different kinds:

Types of Brokers

1. Full-Service Brokers
o Description: Offer a wide range of services, including personalized
investment advice, portfolio management, and financial planning.
o Ideal For: Investors looking for comprehensive support and tailored
investment strategies.
2. Discount Brokers
o Description: Provide basic brokerage services with lower fees. They execute
trades but may not offer personalized advice or research.
o Ideal For: Self-directed investors who prefer to manage their own
investments.
3. Online Brokers
o Description: Operate primarily over the internet, allowing clients to execute trades
through a trading platform. They typically have lower fees.
o Ideal For: Tech-savvy investors who are comfortable with online trading.
4. Direct Access Brokers
o Description: Offer professional trading services for active traders, providing
direct access to market exchanges and trading systems.
o Ideal For: Day traders and institutional clients who require fast execution and
advanced trading tools.
5. Robo-Advisors
o Description: Automated platforms that provide investment management
based on algorithms, typically with low fees.
o Ideal For: Investors seeking a hands-off approach to portfolio management.
6. Investment Advisors
o Description: Registered professionals who provide investment advice,
financial planning, and asset management, often charging a fee based on assets
under management (AUM).
o Ideal For: Clients looking for expert guidance tailored to their financial goals.

Assistants in Brokerage Firms

1. Brokerage Assistants
o Description: Support brokers with administrative tasks, including managing
client accounts, preparing reports, and handling paperwork.
 o Role: Enhance brokers' efficiency and client service.
2. Research Analysts
o Description: Conduct market research, analyze securities, and provide
insights and reports to brokers and clients.
o Role: Assist brokers in making informed recommendations.
3. Compliance Officers
o Description: Ensure that brokerage firms comply with regulations and
industry standards, monitoring transactions and practices.
o Role: Protect the firm from legal issues and maintain ethical standards.
4. Trader Assistants
o Description: Support traders by monitoring market trends, managing trade
orders, and coordinating with other departments.
o Role: Enhance trading efficiency and execution.
5. Customer Service Representatives
o Description: Handle client inquiries, resolve issues, and provide support
related to accounts and transactions.
o Role: Improve client satisfaction and maintain relationships.
6. Financial Analysts
o Description: Analyze financial data and trends to assist brokers in making
investment decisions and strategies.
o Role: Provide critical insights that inform trading and investment strategies.

Each type of broker and their assistants play a vital role in the functioning of the stock
market, ensuring that clients receive the support and services they need to make informed
investment decisions.

registration of sub brokers

The registration of sub-brokers involves a process that allows them to operate under a
registered broker, enabling them to facilitate trades and offer investment services to clients.
Here’s a step-by-step overview of how sub-brokers typically get registered:

1. Eligibility Criteria

 Educational Qualifications: Sub-brokers usually need to have a certain level of

education, often requiring a degree in finance, commerce, or a related field.
 Experience: Prior experience in the financial services industry may be beneficial.

2. Association with a Registered Broker

 Sub-brokers must partner with a registered broker or brokerage firm. This involves
formalizing a business relationship where the sub-broker operates under the umbrella
of the main broker.

3. Application Process
  The sub-broker must fill out an application form provided by the main brokerage firm.
This may include personal information, qualifications, and background details.

4. Regulatory Compliance

 In many jurisdictions, sub-brokers need to register with the relevant regulatory

authority (e.g., SEBI in India).
 This may involve submitting documents that prove compliance with regulatory
requirements, including:
o Proof of education and experience.
o Details of the association with the main broker.
o Financial disclosures, if required.

5. Payment of Fees

 There may be registration fees that need to be paid to the regulatory authority and/or
the main brokerage firm.

6. Passing Required Exams

 In some cases, sub-brokers must pass specific examinations (such as the NISM Series
exams in India) to demonstrate their understanding of financial markets and
regulations.

7. Background Check

 Regulatory authorities may conduct background checks to ensure that the applicant
has no legal or regulatory issues that would disqualify them from acting as a sub-
broker.

8. Issuance of Registration Certificate

 Once all requirements are met, and the application is approved, the regulatory
authority issues a registration certificate, allowing the individual or firm to operate as
a sub-broker.

9. Continuing Compliance

 Sub-brokers must adhere to ongoing compliance requirements, which may include

periodic reporting, renewing their registration, and following ethical practices.

10. Training and Development

 Many brokerage firms provide training programs for sub-brokers to enhance their
knowledge and skills, ensuring they can effectively serve their clients.

Conclusion
The registration of sub-brokers is essential for ensuring that they operate within the
regulatory framework, providing clients with safe and reliable services in the financial
markets. The specific requirements and processes may vary by jurisdiction, so it's important
to consult local regulations for precise details.

Methods of trading in stock exchange

There are several methods of trading in the stock exchange, each catering to different investor
strategies, risk tolerances, and levels of involvement. Here are the primary methods:

1. Market Orders

 Description: An order to buy or sell a stock immediately at the current market price.
 Use: Suitable for traders who want to execute trades quickly without waiting for a
specific price.

2. Limit Orders

 Description: An order to buy or sell a stock at a specified price or better.

 Use: Ideal for investors looking to control the price at which they buy or sell, ensuring
they don’t pay more or receive less than their target price.

3. Stop Orders (Stop-Loss Orders)

 Description: An order to buy or sell a stock once it reaches a specified price, known
as the stop price.
 Use: Commonly used to limit losses on a position. For example, a stop-loss order can
be set to sell a stock if it falls below a certain price.

4. Stop-Limit Orders

 Description: A combination of a stop order and a limit order. Once the stop price is
reached, the order becomes a limit order to buy or sell at the specified price.
 Use: Provides more control than a simple stop order but may not execute if the stock
moves rapidly past the limit price.

5. Day Trading

 Description: Buying and selling stocks within the same trading day, often multiple
times.
 Use: Ideal for active traders looking to capitalize on short-term price movements.

6. Swing Trading

 Description: A medium-term trading strategy that aims to capture price movements

over several days or weeks.
  Use: Suitable for traders who prefer to hold positions longer than a day but shorter
than long-term investors.

7. Position Trading

 Description: A long-term trading strategy where positions are held for months or
years, based on fundamental analysis.
 Use: Ideal for investors focused on long-term growth rather than short-term price
fluctuations.

8. Algorithmic Trading

 Description: Using computer algorithms to execute trades based on predefined

criteria and strategies.
 Use: Commonly used by institutional investors to take advantage of market
inefficiencies at high speeds.

9. Margin Trading

 Description: Borrowing funds from a broker to trade larger amounts than the
investor’s own capital would allow.
 Use: Can amplify profits but also increases the risk of significant losses.

10. Options Trading

 Description: Trading contracts that give the buyer the right, but not the obligation, to
buy or sell an underlying asset at a predetermined price before a specific date.
 Use: Used for speculation, hedging, or income generation through strategies like
covered calls.

11. Exchange-Traded Funds (ETFs) and Mutual Funds

 Description: Investing in pooled funds that hold a diversified portfolio of stocks.

 Use: Suitable for investors looking for diversification without having to manage
individual stocks.

Conclusion

Each trading method has its own advantages and risks, and the choice of method depends on
the investor's goals, experience level, and market conditions. It's essential for traders to
understand their strategies and risk management practices to navigate the stock market
effectively.