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SECONDARY MARKET

SECONDARY MARKET: STOCK EXCHANGES The capital market apart from the primary market also includes the secondary market where the existing issues are traded. These are also known as Stock Market . They enable shareholders to sell their holdings readily, thereby ensuring liquidity. The investors can also continuously re-arrange their assets. The stock exchanges provide a market where such mutually satisfactory prices may be determined. An active secondary market in fact promotes the growth of the primary market and helps in capital formation.

FUNCTIONS OF STOCK EXCHANGES The stock exchanges (SE) provide an organized market place for the investors to buy and sell securities freely. the market for these securities is an almost perfectly competitive one because a large number of seller and buyers participate. the SE provides an auction market in which members of the SE participate to ensure continuity of price and liquidity to investors. An active and healthy secondary market in existing securities, lead to better psychology of expectations, Considerable broadening of investment enquiries render the task of raising resources by entrepreneurs easier.

Continuous Market The basic function of a SE is the creation of a continuous market where securities are bought and sold in volume with little variation in the current market price as trade succeeds one another. The indicators of a continuous market are : Frequency of sales Narrow spread between bids and offers Prompt execution of orders Minimum price changes between transactions as they occur. The benefits are : Creates marketable liquid investments

Liquid Market Liquidity occupies a central place in evaluating the efficiency of an exchange. The characteristics of a liquid market are : Depth: a market has depth if the buy and sell orders are forthcoming around the price at which the share is transacting. Market that lacks depth is shallow. Breadth : the adequate volume of the orders gives breadth to the market. In the absence of which the market are termed thin. Resilience : further the response of the orders to price changes renders the market resilient. Empirical Measurement of Liquidity Liquidity is measured by the number of days a company's shares is traded , out of the number of days in the year when the market is open. Normally a share is considered actively traded and liquid if it is traded on 50% days when the market is open. Liquidity is also measured by the variation of price from one trade to another. If the difference between the lowest asked price and the highest bid-price is wide, the market is said to lack depth and considered shallow.

Fair Price Determination The prices in the stock exchange are determined by the interplay of the forces of supply and demand. The bargains are struck at the fairest price. Active bidding and a two way auction trading takes place in the stock exchange. The result is as near a market for free trading and free competition as can be found anywhere. There is no obvious relationship between book value / par value and market value in the matter of many shares.

Aid to Financing Industry Listed companies find it helpful to sell further issues of their shares in the primary market based on the good performance of their earlier shares. An active market and a good market price for the company's shares (reflecting the past performance and future prospects) makes the task of raising funds through further issues easier. Other Functions The stipulation on disclosure and transparency ensures that the investors have access to information on the listed companies particularly with regard to their financial conditions. This also protects the investor's interests by eliminating the dishonest and irregular practices .

Demutualisation of Stock Exchanges SE is a corporate tax paying entity Separation of ownership rights and trading rights Minimum stake of a single shareholder cannot exceed 5% of the total equity. 51%shares to investors who do not have trading rights. This allows better regulation. 49% foreign investment in SEs [ 26 % FDI : 23 % by FII ] Access to more funds for investment in technology , mergers and strategic alliances. NSE , BSE and OTCEI are demutualised. Benefits: Safeguard the interest of the investors Brings out greater transparency in the functioning of the SEs Reduces the conflict of interest between the exchange and the brokers and the chances of brokers using stock exchanges for personal gains. Strategic investments assist in growth of SE and make them competitive globally

TRADING IN STOCK EXCHANGES


Order Driven / Customer Driven : orders from all over the country are entered into an electronic system and matched directly and continuously without the involvement of a market maker. Quote Driven / Dealer Driven: there are market makers who continuously offer two way quotes buy and sell quotes - and are willing to buy and sell any quantity. A Hybrid system New York Stock Exchange (NYSE) : an order driven auction market National Association of Security Dealers Automated Quotation System (NASDAQ) : over the counter market ,i.e. a quote driven or dealer market

In India generally we have order driven auction market NSE: order driven BSE : hybrid market , auction system but quote driven. TRADING ARRANGEMENTS Trading NSE introduced for the first time in India, fully automated screen based trading. It uses a modern, fully computerized trading system designed to offer investors across the length and breadth of the country a safe and easy way to invest. The NSE trading system called 'National Exchange for Automated Trading' [NEAT].

BSE On-Line Trading System [BOLT]

Listing It means admission of securities of an issuer to trading privileges on a stock exchange through a formal agreement. The prime objective of admission to dealings on the exchange is to provide liquidity and marketability to securities, as also to provide a mechanism for effective management of trading. Grouping ***A Group : Companies with very large trading volumes ***B1 Group : Companies with high growth potential and trading volumes ***B2 Group : Companies with low trading volumes ***Z Group : Companies which do not meet the rules, regulations and stipulations laid down by the exchange.

Benefits of Listing Listing provides an opportunity to the corporates / entrepreneurs to raise capital to fund new projects/undertake expansions/diversifications and for acquisitions. Listing also provides an exit route to private equity investors as well as liquidity to the ESOP-holding employees.

Listing also helps generate an independent valuation of the company by the market. Listing raises a company's public profile with customers, suppliers, investors, financial institutions and the media. A listed company is typically covered in analyst reports and may also be included in one or more of indices of the stock exchanges. An initial listing increases a company's ability to raise further capital through various routes like preferential issue, rights issue, Qualified Institutional Placements and ADRs / GDRs / FCCBs, and in the process attract a wide and varied body of institutional and professional investors. Listing leads to better and timely disclosures and thus also protects the interest of the investors.

Stock Index

Stock Index captures the behavior of the overall equity market. Movements of the index represents the changing expectations of the stock market about future dividends of India's corporate sector. The ideal index gives us instant-to-instant readings about how the stock market perceives the future of India's corporate sector. Ups and Downs of an Index When the stock market thinks that the prospective dividends in the future will be better than previously thought the index goes up. When prospects of dividends in the future become pessimistic, the index drops.
BSE Indices : Sensex , BSE-100 , BSE-200 , BSE-500 ,BSE Midcap , BSE Smallcap NSE Indices : S&P CNX Nifty , CNX Nifty Junior-100 second rung of growth stocks , CNX MidCap , CNX IT Sector Index , CNX PSE Index -20 PSE stocks, CNX MNC Index -15 listed companies

Guidelines for selection of constituents in SENSEX are as follows: Listed History Trading Frequency Market Capitalization Weightage Industry / Sector Representation Final Rank Track Record Large Cap Stocks - Companies with large capitalization. Traditionally, the safest stocks, but also the least rewarding in return. Infosys Technologies , Bharti-Tele-Ventures Ltd. , ICICI Bank Ltd , HDFC Ltd , ONGC Ltd , Maruti Udyog Ltd , Mid Cap Stocks - Bigger than small caps, smaller than large caps. They are in the middle of the road in terms of risk and reward. India-bulls Securities Ltd. ; Thomas Cook ( India ) Ltd. ; Century Plyboards ( India ) Ltd. ; Jet Airways( India ) Ltd. ; Parshavnath Developers Ltd. ; Nicholas Piramal India Ltd. Small Cap Stocks - Smaller companies that usually grow faster, giving a better return, but are riskier because they have less protection against going out of business due to their small size. Kajaria Ceramics Ltd. ; Kohinoor Foods Ltd. ; Bata India Ltd. ; Arvind Mills Ltd. ; J.K. Cement Ltd.

Risk Management A sound risk management system is integral to an efficient clearing and settlement system. NSE introduced for the first time in India, risk containment measures that were common internationally but were absent from the Indian securities markets. NSCCL has put in place a comprehensive risk management system, which is constantly upgraded to pre-empt market failures. The Clearing Corporation ensures that trading member obligations are commensurate with their networth.
Risk Containment Measures capital adequacy requirements of members, position limits based on capital, stringent margin requirements, monitoring of member performance and track record, automatic disablement from trading when limits

are

breached,

etc.

CAPITAL ADEQUACY NORMS FOR BROKERS Base Minimum Capital Security deposit kept by members in SEs form the base minimum capital 25% of base minimum capital to be kept in cash with the exchange 25% in form of long term (3yrs or more) fixed deposit with bank suggested by SE Remaining maintained in the form of securities the securities should be in the name of members and pledged in favor of SE

Intra-day Turnover Limit Gross turnover (buy+ sell) intra-day of the member should not exceed 20 times the base capital. Members violating the intra-day gross turnover limit at any time on any trading day are not be permitted to trade forthwith. When a member crosses 100% of the

intra-day trading limit or gross exposure limit a message is flashed on the screen which says "CAPITAL ADEQUACY LIMIT VIOLATED" or "GROSS EXPOSURE LIMIT VIOLATED" respectively and immediately all the [Trader Work Stations] TWSs of the member get de-activated.
Members are given a maximum of 15 days time from the date of the violation to bring in the additional capital. Upon members failing to deposit the additional capital within the stipulated time, the reduced turnover limit of 15 times the base capital would be applicable for a period of one month from the last date for providing the margin deposits. To trade in excess of this limit, a broker would be required to deposit additional capital with the exchange.

Margins SEs impose different types of margins on brokers for individuals stocks depending on the exposures taken by these brokers in these stocks , both on proprietary basis and on behalf of clients , vis--vis the overall market in the scrips. Several of these margins are paid upfront by brokers. These margins are collected to prevent operators from taking market positions in excess of their buying capacities and are used to settle dues to the exchanges / clearing corporations / traders in the event of any fund shortage faced by the brokers. The margins vary from operators to operator depending on the size of the position taken in the market.
Failure to pay Margin Non-payment of either the whole or part of the margin amount due will be treated as a violation of the Bye Laws of the Clearing Corporation and will attract penal charges @ 0.09% per day of the amount not paid throughout the period of non-payment. In case a member has a margin shortage of Rs. 10 lacs or above for more than 10 occasions in the past 4 weeks, the gross exposure multiple of the member will be reduced to one level lower at the time of re-activation of their trading terminals

Circuit Breakers To contain excessive volatility in prices , the Sebi introduced , in 1995 , scrip wise daily circuit breakers / price-bands. The circuit breakers bring about a halt / suspension in trading automatically for a specified period if the market prices vary unusually on either side i.e. move out of a pre-specified band . Circuit breaker do not halt trading but no order is permitted if it falls out of a specified price range. Both NSE and BSE have implemented the circuit limit system on the stocks. They have applied the stock wise circuit limit system at four levels i.e. 2%, 5%, 10% and 20%. In index-based market the circuit works at three stages : 10% ; 15% ; 20%.