BUY Secondary Markets

SELL

Prof. Atul Mumbarkar

What is 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.
 Products that Secondary Market deals with
The secondary market deals with below financial
products / instruments –

- Equity Shares

- Rights Issue/ Rights Shares

- Bonus Shares

- Preferred Stock/ Preference shares

- Cumulative Preference Shares

- Cumulative Convertible Preference Shares

- Participating Preference Shares

 Products that Secondary Market deals with
- Bond

- Zero Coupon Bond

- Convertible Bond

- Debentures

- Commercial Paper

- Coupons

- Treasury Bills
Primary Markets Vs Secondary Markets
- 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/pre- issued securities are
traded amongst investors.

- Secondary market could be either auction or dealer

market.

- While stock exchange is the part of an auction

market, Over-the-Counter (OTC) is a part of the
dealer market.
 Broker and Sub-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.
Broker and Sub-broker

- A sub broker is a person who is registered

with SEBI as such and is affiliated to a
member of a recognized stock exchange.

- However, while a stock broker is the middle

man between an investor and the stock
exchange, a sub broker is the middle man for
the stock broker and the investor.

- Meaning, the job of a sub broker is to

mediate between the broker and client.
 Broker and Sub-broker

- One of the biggest is that while brokers

are listed as trading members of the
stock exchange, sub brokers are not.

- This does not mean that sub brokers do

not have any certification from the stock
exchange however, as they require a
Certification of Registration from SEBI in
order to conduct their business.
 Broker and Sub-broker
- Another key difference between a broker and a sub
broker is that while brokers are paid in brokerage
fees, sub brokers are paid in commission.

- As per law, only brokers who are registered as

trading members of the stock exchange are
allowed to charge brokerage fees, sub brokers are
not.

- In other words, the broker makes a brokerage fee

on every transaction his or her client makes and
the sub broker gets a percentage, which is his
commission.
 Broker and Sub-broker
Rank Franchisor
1 Angel Broking Franchise
2 Sharekhan Franchise
3 Motilal Oswal Franchise
4 IIFL Franchise
5 ICICI Direct Franchise
6 SMC Franchise
7 Zerodha Partner
8 Nirmal Bang Franchise
9 Kotak Securities Franchise
10 Upstox Partner
 Auction Process
- An auction process is a mechanism where
exchange auctions the investor’s stock
holding when the person had sold the
stock but is unable to deliver it within a
stipulated time period.

- 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 are
recovered from the client.
Auction Process
- Equity delivery based trading in India works
on a T+2 rolling settlement cycle.

- Which means that when you buy shares on,

say, Monday (also called T day), you get the
shares on Wednesday (T + 2 day).

- Similarly, if you sold the shares on Monday,

you are required to give delivery of the
shares on Wednesday after which you will get
the proceeds from the sale (cash) to withdraw
on Wednesday (T+2 day).
 Auction Process
- If the client fails to transfer the shares within
the stipulated time, such transaction results
into default of payin obligation and short
delivery of shares.

- The buyer of the auction of shares is the

rightful acquirer of the shares and the shares
needs to be transferred to his account.

- Since the seller has defaulted in delivery of the

shares, the exchange would put the
undelivered shares for “Auction”.

- This Auction will happen on the T+2 day itself.

 Arbitration

- Arbitration is an alternative dispute resolution

mechanism provided by a stock exchange for
resolving disputes between the trading
members and their clients in respect of trades
done on the exchange

- It is a procedure in which a dispute is

submitted, by agreement of the parties, to one
or more arbitrators who make a binding
decision on the dispute.
Arbitration

- In choosing arbitration, the parties

opt for a private dispute resolution
procedure instead of going to court.

- Arbitration can only take place if

both parties have agreed to it.
Rolling Settlement
- In a Rolling Settlement, trades executed during
the day are settled based on the net obligations
for the day.

- Presently the trades pertaining to the rolling

settlement are settled on a T+2 day basis where T
stands for the trade day. Hence, trades executed
on a Monday are typically settled on the following
Wednesday (considering 2 working days from the
trade day).

- The funds and securities pay-in and pay-out are

carried out on T+2 day.
 Pay-In day and Pay-Out day

- Pay in day is the day when the brokers shall make

payment or delivery of securities to the exchange.

- Pay out day is the day when the exchange makes

payment or delivery of securities to the broker.

- The exchanges have to ensure that the pay out of

funds and securities to the clients is done by the
broker within 24 hours of the payout.

- The Exchanges will have to issue press release

immediately after pay out.
 Investment Protection Fund (IPF)

- Investor Protection Fund is the fund set up by the

Stock Exchanges to meet the legitimate
investment claims of the clients of the defaulting
members that are not of speculative nature.

- SEBI has prescribed guidelines for utilization of

IPF at the Stock Exchanges.

- The Stock Exchanges have been permitted to fix

suitable compensation limits, in consultation with
the IPF/CPF Trust.
 Investment Protection Fund (IPF)

- It has been provided that the amount of compensation available against a single
claim of an investor arising out of default by a member broker of a Stock Exchange
shall not be less than Rs. 1 lakh in case of major Stock Exchanges viz., BSE and
NSE, and Rs. 50,000/- in case of other Stock Exchanges.

- NSE has established an Investor Protection Fund with the objective of compensating
investors in the event of defaulters' assets not being sufficient to meet the admitted
claims of investors, promoting investor education, awareness and research.

- The Investor Protection Fund is administered by way of registered Trust managed by

Trustees comprising of Public representative, investor association representative,
Board Members and Senior officials of the Exchange.
 Clearing House Mechanism
- A clearing house is an intermediary between
buyers and sellers of financial instruments.

- It is an agency or separate corporation of a

exchange responsible for settling trading accounts,
clearing trades, collecting and maintaining margin
monies, regulating delivery, and reporting trading
data.

- Its main role is to ensure that the transaction goes

smoothly, with the buyer receiving the tradable
goods he intends to acquire and the seller
receiving the right amount paid for the tradable
goods he is selling.
 Clearing House Mechanism
- Every Clearing Member is required to
maintain and operate clearing accounts with
any of the empaneled clearing banks at the
designated clearing bank branches.

- The clearing accounts are to be used

exclusively for clearing & settlement
operations.

- A Clearing Member (CM) has the

responsibility of clearing and settlement of all
deals executed by Trading Members (TM),
who clear and settle such deals through
them.
 Clearing House Mechanism
The cycle for rolling equity settlements on the National Stock Exchange (NSE) is as follows:

Activity Working Days

Rolling Settlement Trading T

Clearing Including Custodial Confirmation and Delivery Generation T+1

Settlement Through Securities and Funds Pay-In and Pay-Out T+2

Post Settlement Auction T+2

Auction Settlement T+3

Reporting for Bad Deliveries T+4

Pay-In-Pay-Out of Rectified Bad Deliveries T+6

Re-Reporting of Bad Deliveries T+8

Closing of Re-Bad Deliveries T+9

 Clearing House Mechanism
NSE Clearing has empaneled 15 clearing banks namely

- Axis Bank Ltd.,

- Bank of India Ltd.,

- Canara Bank Ltd.,

- Citibank N.A.,

- The Hong Kong & Shanghai Banking Corporation Ltd.,

- ICICI Bank Ltd.,

- HDFC Bank Ltd.,

- IDBI Bank Ltd.,

 Clearing House Mechanism
NSE Clearing has empaneled 15 clearing banks namely

- IndusInd Bank Ltd.,

- JPMorgan Chase Bank,

- Kotak Mahindra Bank Ltd.,

- Standard Chartered Bank,

- Union Bank of India,

- State Bank of India and

- Yes Bank.
 Portfolio Management
- Portfolio is an investment into instruments like
equities, derivatives, debts, bullion or
combination of few or all of them.

- Portfolio management is the process of

managing investments with the help of right
tool and strategy to generate optimum return
downsizing risk within a given time horizon.

- Portfolio Manager is a person who understands

his client’s investment needs and suggests a
suitable investment mix to meet his investment
objectives while maintaining risk-return balance
Objectives of Portfolio Management
• Capital Appreciation

• Investment Goals

• Portfolio Efficiency

• Risk Mitigation

• Asset Allocation

• Liquidity

• Diversification

• Tax Planning
Types of Portfolio Management

1. ACTIVE PORTFOLIO MANAGEMENT

Portfolio Manager aims at generating better

returns than market.

They actively participate in analyzing the

market opportunity to make the right move.

Generally, they prefer purchasing stocks when

they are undervalued and sell them off when
their value increases.
 Types of Portfolio Management

2. PASSIVE PORTFOLIO
MANAGEMENT

This type of portfolio management is

concerned with a fixed strategy that
aligns perfectly with the efficient
market theory.

Managers generally tend to invest in

index fund that provides low but
consistent return in longer period.
Types of Portfolio Management

3. DISCRETIONARY PORTFOLIO
MANAGEMENT

In this particular management type, the

portfolio managers are entrusted with the
authority to make decision and invest as
per their discretion on behalf of investors.

Based on client profiling they tend to

decide the most suitable portfolio mix
matching with client’s investment goal and
risk appetite.
 Types of Portfolio Management

4. NON-DISCRETIONARY MANAGEMENT

Under this management, the managers act

as financial counselor who provide advice on
investment.

It is up to investors whether to accept the

advice or reject it.
Process of Portfolio Management
 Who should go for PMS ?

- Investors who intend to invest across

different asset classes like bonds, stocks,
mutual funds, metals, commodities etc.
but have limited knowledge about
investment market.

- Investors who do not have enough time

to track their investments or rebalance
their portfolio.
Who should go for PMS ?

- Investors who do not have enough

time to track their investments or
rebalance their portfolio.
Who should go for PMS ?

- Investors who do not understand the impact

of company or industry news, rumors,
demand, supply, changes in global bourses or
foreign exchange, Indian & International
political changes, economic policy changes,
etc.
PMS in India

- India offers tremendous growth potential

because its growth is far from reaching the
saturation levels.

- Infusion of foreign funds is helping GDP

growth.

- Early lead in technology and IT spectrum

giving FE revenues.

- Healthy banking and legal system propagates

confidence.
 PMS in India

- Natural resources, huge educated

middle class population ushers a
confidence for India’s growth story in
the long run.

- Small investors deploy through

mutual funds while High Net worth
Investors invests through Portfolio
Management Service providers
 PMS in India
Rank Best PMS House

1 Motilal Oswal PMS

2 Ask PMS

3 Kotak PMS

4 ICICI Prudential PMS

5 Birla Sunlife PMS

6 Alchemy PMS

7 Invesco PMS

8 Unifi Capital PMS

9 NJ Advisory PMS

10 Forefront PMS
 Mutual Funds
- Pool money from large number of investors

- Stocks owned by the fund in its name

- Use management expertise to provide returns

as per the common investment policy

- Can be close-ended and open-ended

- Close-ended: Fund matures after prescribed

period

- Open-ended: Fund has infinite lifetime

(theoretically)
Portfolio Management
- One to one agreement between investors and Portfolio
Manager

- Customized portfolio as per the risk profile of investors

and hence accordingly individualized investment
decisions

- Bank account and stocks are held under investor’s name

- Can be sold at market value at any time

- Regular report on investor portfolio value is provided to

investors

- Expertise of Portfolio Manager (fundamental and

technical) in making investment decision
Portfolio Management