Secondary Market in India
A secondary market is a marketplace where participants can trade the securities issued in the primary market. People can buy and sell shares without the intervention of the issuing company. The most commonly known secondary market is the Stock Market. It helps to provide liquidity to the securities issued in the primary market. SEBI regulates this market, and the price is determined by the market forces of demand and supply.
Some of the players in the secondary market are:
- Retail Investors.
- Brokers and Advisors
- Financial Institutions or intermediaries such as Banks, NBFC’s.
Functions of Secondary Market
There are three major functions of the secondary market –
- Continuous/Active Trading: It provides a market place where investors can buy and sell securities at any time.
- Provides Market Placing: It provides an active trading platform where investors can buy and sell securities at prices that vary very little with each transaction. This helps to provide liquidity to the assets traded in the secondary market.
- Provides Liquidity: It allows investors to liquidate their assets by selling their securities at any point on the exchange.
The secondary market also facilitates
- Asset Pricing: The price in the secondary market is determined by the demand and supply of a particular security, and the stock market makes these transaction prices to the public.
- Stimulation of New Finances: Investors trading in the secondary market can be encouraged to invest in the primary market as well. Thus, helping the issuing authority to raise new finance.
- Monitoring Activities: The secondary market is regulated by the Securities and Exchange Board of India (SEBI), which helps to protect the integrity of members, employees, listed firms, clients, and other related bodies/persons.
- Risk Premium: Secondary market is a very risky place to invest, but an active secondary market provides higher returns.
- As an Indicator of the Economy: An organized secondary market indicates the health of a nation’s economy.
- As Savings-Investment Linkage: Secondary market provides a place where investors can mobilize their savings and channelize them into the securities to earn higher returns.
How to Buy and Sell in a Secondary Market?
The secondary market provides a marketplace where investors can buy and sell securities issued in the primary market. To buy and sell the securities, the investors have to open a Demat account with a broking company that would provide a platform where investors can put in trades and keep securities in dematerialized form. The broking company charges a fee, usually known as broking charges for the services.
To make a trade, the participant can take the market price or put in the price near the trading price and put in the no. of securities they want to buy and sell particular security in the Demat account. The participants involved don’t know who they are buying from or selling to, and demand and supply forces determine the prices.
The trade takes two days to settle, i.e., once the trader has put in the trade in the Demat account, the buyer will receive the shares, and the seller will receive the money after two days.
Types of Secondary Market Issue
- Stock Exchange: It is a place or a platform where buyers and sellers meet. It provides the prices of securities being traded and protects the interests of the stakeholders; it is self and SEBI-regulated. Example – Bombay Stock Exchange (BSE) and National Stock Exchange (NSE).
- Over the Counter (OTC): In an over-the-counter contract, two or more participants meet privately at one place and decided the term of the agreement. In this type of agreement, there is counterparty risk as no one regulates it, and there is a risk of default from either party.
- Auction Market: In this type of market, multiple buyers’ bid for a single security, and the securities are sold to the person with the highest bid.
- Dealer Market: In this type of market, the transaction takes place over the phone, text, or fax machine.
Instruments of Secondary Market
- Fixed Income: These are those securities that provide regular income. These are primarily debt instruments that offer regular returns like interests, and the principal is paid on the maturity date. Example – Debentures, Bonds, and Preference Shares
- Variable Income: These securities provide variable income due to their dependence on the market changes. Example – Shares and Derivatives.
- Hybrid Instruments: These instruments are a mix of two or more securities, they have two components one is fixed, and the other depends on the price at the time of maturity. Example – Convertible Bonds, these can be converted to some no. of shares of the company.
Regulation of Secondary Market
The capital market in India is regulated by the Securities and Exchange Board of India (SEBI). SEBI was established under the SEBI Act, 1992 to regulate the stock exchanges in India. The role of SEBI is regulating the market by protecting the stakeholders’ interests and promoting trading and investment.
The functions of SEBI are:
1. It is the governing body of the exchanges in India.
2. It helps in the development of the infrastructure of the exchanges.
3. It operates as a settlement and clearinghouse.
4. Provides a wide variety of securities like stock, bonds, debt, etc.
5. Help in determine and stabilizing the price of securities.
6. Delisting of securities.
7. Regulation of brokers.
8. Protect against insider trading.
- Liquidity: An investor can convert the securities into cash at any point in time.
- Benchmark: The secondary market provides a fair valuation of the securities and is also an indicator of how the economy and the company are performing.
- Price: Secondary market incorporates the changes in the market with the availability of new information.
- Safety: Due to high regulation in the market, the investor’s money and interests are protected from fraudulent activities.
- Profits: It helps the investors to make high profits in less time.
- Risk: Secondary market is quite volatile, and the prices may fluctuate in a very short period.
- High Cost: As the trading takes place through a broking company, the brokerage or commission charges add to the securities’ cost.
- Time-Consuming: As there are some formalities to be completed before trading in the secondary market, it is more time-consuming.
- External Factors: External factors such as like government policies, geo-political issues may bring hindrance in the market.