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, notebills 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,
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 amount of
securities they applied for.

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8. Minimum Investment: Some primary market offerings may have minimum investment requirements, which
can limit participation tolarger investors or institutions.
9. Lock-Up Period: In some cases, issuers or underwriters may impose alock-up period on early investors,
restricting their ability to sell thesecurities for a specified period after the initial offering.
10. Market Impact: The primary market offering can impact the secondarymarket, as the introduction of new
securities may affect supply anddemand dynamics, leading to price fluctuations.
11. Long-term Investments: Investors in the primary market often have alonger-term investment horizon, as they
are typically buying securitieswith the intention of holding them for an extended period.
12. Subscription Period: There is a specified period during which investorscan subscribe to or purchase the
newly issued securities. Once thisperiod expires, the issuer allocates the securities and trading
maycommence 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 mobilisation of savings in an economy.
• Funds are mobilised 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.
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 analysing IPO shares
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• 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.

• 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.

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• 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 equitysecurities, stock exchanges or listing
authorities play a role in theprimary market by providing a platform for the initial listing and tradingof 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 otherparticipants.
• 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.

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• 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 bycorporations, 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 beconverted 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 instrumentsthat give the holder the right to
purchase the issuer's common stock ata predetermined price within a specified period. They are often
issuedas part of other securities offerings.
• 11. Commercial Paper: Commercial paper is a short-term debt instrumentissued by corporations to raise
working capital. It typically hasmaturities ranging from a few days to a few months.
• 12. Certificates of Deposit (CDs): Banks issue certificates of deposit in theprimary market. CDs represent a
time deposit, where investors lend↓money to a bank for a fixed period in exchange for interest.
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.
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 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.
 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:

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 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.
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.
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.

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 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
 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.
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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.
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:
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1. Fundamental Analysis:
1. 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:
1. 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:
1. 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.
4. Growth Investing:
1. 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:
1. 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:
1. 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:
1. 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:
1. 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:
1. 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:

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1. 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:
1. 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:
1. 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 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.
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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.
 Functions of Stock Exchanges (BSE, NSE, and OTCEI):
1. Listing of Securities:
1. 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:
1. 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:
1. 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:
1. 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:
1. 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:

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1. 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:
1. 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:
1. 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:
1. 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:
1. 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:
1. Stock exchanges implement risk management measures to mitigate counterparty risk. This includes
margin requirements and mechanisms for handling defaults.
6. Market Surveillance:
1. 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.

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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.
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.

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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.
 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

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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 lead 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.
 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
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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.
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:

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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 Capital Market & Money Market.

Capital Market (CM)

(1) CM Deals in Long-term(5-20yrs)and Medium-term(1-5yrs)

(2) CM Arranges Large amount of funds.
(3) Cm Makes funds available for fund fixed capital i.e., investment in fixed assets
(4) CM has limited and selected Market.
(5) The Rate of interest in CM is generally Low.
(6) Long-term Securities like (a) equality (b) prey Shares(c) debentures and bonds.
(7) CM investment Banks like special financial Corporations investment trusts, mutual
funds are the leading financial institutions.
(8) It links between investing parties and industrial commercial enterprises.

Money Market (MM)

(1) Money Market deals in Short-term funds for the period up to 1 year.
(2) MM arranges small amount of funds.
(3) MM makes funds available for working capital.
(4) MM has widely distributed Market.
(5) MM interest is generally high.
(6) MM Deals with Short-term credit instruments such as (a) Trade Bill (bill of Exchange) (b)
treasury Bills (c) Commercial papers (d) certificate of deposits etc.
(7) In MM commercial banks are the principal financial institutions.
(8) MM acts as a link between the depositors and the borrowers.

Different Between Primary Market & Secondary Market

Primary market

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(i) New issue of securities are dealt in PM.
(ii) In PM securities are exchange between Co‘s and investors.
(iii) PM promotes capital formation directly.
(iv) In the PM securities are only brought by the investors from Co‘s and they are not sold.
(v) The prices of securities dealt in the PM are determined by the Mgt. of issuing Co‘s.
(vi) PM securities are issued to investors for the fint time

Secondary market

(i) Existing securities are dealt in Secondary Market.

(ii) Securities are exchanged between investors.
(iii) Secondary Market Promotes capital formation indirectly
(iv) In the Secondary Market securities are bought and sold.
(v) Price determined by the demand & the supply of securities.
(vi) Securities can be bought & sold any number of times.

RECOGNISED STOCK EXCHANGE OF INDIA:-

Bombay Stock Exchange (BSE)
National Stock Exchange of India (NSE)
Calcutta Stock Exchange (CSE)
Bangalore Stock Exchange (BgSE)
Madras Stock Exchange (MSE)
Union Stock Exchange of India (USE)
Multi Commodity Exchange (MCX)
Over the Counter Exchange of India (OTCEI)
Inter-connected Stock Exchange of India (ISE)
Coimbatore Stock Exchange (CSX)
Aboro Stock Exchange (ASE)
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
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Meerut Stock Exchange Ltd
Intreted 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

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
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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:
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 individua

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