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This article contains all the information ralated to secondary market. Secondary market is a placewhere you can buy and sell shares of companies. But trading in secondary market requires some basic knowledge. This article will provide you with all such required information. Secondary markets are defined as the markets where the securities which are initially issued by the companies are traded. The trading involves buying and selling of the securities. In India the process of trading can be dated back to the year 1875. The secondary market plays a very vital role as one of the indicators of the industrial development of a nation. Each and every country has the secondary markets some of the well known stock exchanges are Bombay Stock Exchange (BSE) of India, New York Stock Exchange (NYSE) of America, National Stock Exchange(NSE), London Stock Exchange of The Great Britain, NASDAQ etc. The securities or the financial instruments are issued in the primary market and the investors purchase these instruments directly from the IPO or through the Private Placement. Investors who have purchased the securities or the financial instruments sell these in the secondary market to other investors. Various securities & financial instruments that are traded in the stock market are;
• Equity Shares
• Preference Shares
• Bonus Shares
• Commercial Papers
• Treasury Bills
For the first time the process of trading started in India in the year 1875 in Bombay which was then called as “Native Share & Stock Broker’s Association” the total number of members were 318 and the amount of membership fees that they paid was Rs.1 Since then this association has been growing and now it is called as the BSE or the Bombay Stock Exchange which is known worldwide and is considered as a barometer to measure the industrial growth of the developing India.
There are other stock exchanges present in India apart from BSE & NSE some of them are;
• Bangalore Stock Exchange
• Cochin Stock Exchange
• Hyderabad Stock Exchange
• Delhi Stock Exchange
• Pune Stock Exchange
• Madras Stock Exchange
• Bhubaneshwar Stock Exchange
The trading is carried out in the secondary market and there are various people & procedures followed to carry out the trading. A pre-requisite for a company’s securities to be traded in the secondary market is that the company should be listed in the stock exchange.
Listing is the process of registering a company in the stock exchange. It has been made compulsory by the SEBI (Securities & Exchange Board of India) that a company which is intending to offer shares/securities through the prospectus must be listed in the stock exchange. A company can be listed in one or more stock exchanges but once the company is listed it has to follow all the rules and regulations that have been laid down by the stock exchange. The company has to provide all the information that the stock exchange asks for during the procedure of listing. The company concerned must apply in a prescribed form along with the various documents that are required by the authorities of the stock exchange for example;
• Certified copies of Memorandum & Articles of Association
• Underwriting Agreements
• Particulars of the shares & debentures which are to be issued and their specimen copies
• Copies of balance sheets & audited accounts of the last 5 years
• Particulars of the dividends and interest paid in the previous years, regarding the capital structure & brief history of the company, etc
The above are just some of the documents apart from these there are other documents and criteria and obligations which are to be met by the company. The authorities scrutinize the documents and if they are satisfied then call upon the company to sign the listing agreement and this listing agreement contains all the rules and regulations that the company must follow failing which the stock exchange may cancel the listing or suspend the trading of shares & securities of that particular company.
In the secondary market even an individual person can trade but for an individual to trade in the market either he must be a broker or else the individual must hire a broker. In the stock exchanges only the brokers are allowed to enter and to do the trading.
Broker is a person who trades in the stock exchange. A broker can represent his clients or himself. A broker is ears & eyes of the individual investor because it is the broker who knows in & out of the market and has the right knowledge of the trading. A broker can always suggest his clients to invest in the right company as he has a fair idea of the way in which the market is behaving. There are various brokerages in India some of them are Indiabulls, Sharekhan, India Infoline etc. Brokers are part of the secondary market and are registered to the stock market. Anyone can become a broker if he can pass through the written test and get through the interview conducted by SEBI. There are certain criteria or obligations that he must fulfill to become a broker like he should be a citizen of India, he should not be declared as bankrupt, he should not be having any criminal records, he must have completed 12th class etc.
There are various kinds of brokers in the market. Following are the variousekinds of brokers and their assistants :
These are the first kind and are the one who generally represent their clients. These brokers have large number of clients from whom they receive the orders and accordingly execute the orders through the jobbers. The brokers charge commission for every transaction they do on behalf of their clients.
A jobber is an independent & professional broker. The jobbers keep a close watch on the market and make a forecast about the worth of the securities. A jobber purchases the securities and sell them at a higher price hence the main motive of this kind of brokers is to earn profits. Usually when a broker has to either sell or purchase the securities they approach the jobbers and the jobbers give a two-way price or it is called as double-barelled price. The lower limit is the price at which he is going to purchase the securities and the higher indicates the selling price. The margins whatever the jobbers gain is called as the "jobber’s turn".
These are the assistants of the stock broker. A broker cannot be always present on the trading floor (it’s a place or the floor where the actual trading takes place) so he appoints clerks who represent him and carry out the trading on his behalf. According to the rules a stock broker can appoint only limited number of clerks and he will be solely responsible for every transaction or the trading that is done by the clerk.
He acts as an agent for a broker. The sub-broker is not a part of the stock exchange but he is subject to all the rules & regulations that are applicable for the member brokers. The sub-broker gets the clients to the broker. Based on the business that he has brought fot the broker he is paid commission. The sub-brokers are called as “the Remisiers” in BSE.
Following are the different steps involved in the Trading process
Step 1: First step is that the investors who are interested in investing in the stock market choose a broker or a brokerage firm who can represent them in the stock market.
Step 2: The clients place the order with their broker. In this world of technology the orders are usually placed over the phone calls. The clients call up their brokers and tell him to purchase or sell the shares based on their interest or some of the clients ask the suggestion from the broker and if convinced go ahead with that.
Step 3: The broker based on the orders of the clients approaches the jobbers and fixes the price.
Step 4: Once the transaction has been the details are taken down in a small rough book.
Step 5: Once the transaction has taken place the broker /authorized clerk prepares a contract note it is a written agreement which contains all the details regarding the selling/buying of the shares and the brokerage that is charged. This agreement is sent to the client also.
Step 6: Finally the shares are delivered to the client along with the transfer deed which is duly signed by the transferor as it has been a rule to have a Demat account so, now the shares are directly transferred to the account and there is no need of signing the transfer deed.
Dematerialization is nothing but the physical form of share certificates are converted to the electronic form and are stored with the depository participant. A depository holds all the securities of its clients in the electronic format and it facilitates easy transfer of the ownership of the certificates when the trading is done. A depository participant is an intermediary and it must be registered with SEBI to offer the depository related services.
The process is as follows :
With the introduction of this technology of dematerialization of the shares it has paved way for easy trading. Some of the advantages are :
It has been made compulsory by SEBI that all the investors who are interested in trading must and should have the demat account.
SEBI (Securities and Exchange Board of India) is the regulatory body of the Indian share market. SEBI protects the interests of the investors in securities and also promotes and regulates the securities market and related matters.