NCERT Textbook: Secondary Market | Financial Literacy for Class 10 PDF Download

 Page 1


4.1 Introduction
4.1.1 Stock Exchange
What is meant by Secondary market?
What is the role of the Secondary Market?
What is the difference between the Primary Market and the Secondary Market?
What is the role of a Stock Exchange in buying and selling shares?
What is Demutualisation of stock exchanges?
How is a demutualised exchange different from a mutual exchange?
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.
For the general investor, the secondary market provides an efficient platform for trading of his 
securities. For the management of the company, Secondary equity markets serve as a monitoring 
and control conduit—by facilitating value-enhancing control activities, enabling implementation 
of incentive-based management contracts, and aggregating information (via price discovery) that 
guides management decisions.
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 venue in which already existing/pre-
issued securities are traded among 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.
The stock exchanges in India, under the overall supervision of the regulatory authority, the 
Securities and Exchange Board of India (SEBI), provide a trading platform, where buyers and 
sellers can meet to transact in securities. The trading platform provided by NSE is an electronic 
one and there is no need for buyers and sellers to meet at a physical location to trade. They can 
trade through the computerized trading screens available with the NSE trading members or the 
internet based trading facility provided by the trading members of NSE.
Demutualisation refers to the legal structure of an exchange whereby the ownership, the 
management and the trading rights at the exchange are segregated from one another.
In a mutual exchange, the three functions of ownership, management and trading are 
concentrated into a single Group. Here, the broker members of the exchange are both the owners 
and the traders on the exchange and they further manage the exchange as well. This at times can 
lead to conflicts of interest in decision making. A demutualised exchange, on the other hand, has 
all these three functions clearly segregated, i.e. the ownership, management and trading are in 
separate hands.
SECONDARY MARKET
Chapter 4
4.1.2 Stock Trading
What is Screen Based Trading?
What is NEAT?
How to place orders with the broker?
How does an investor get access to internet based trading facility?
What is a Contract Note?
What details are required to be mentioned on the contract note issued by the stock 
broker?
The trading on stock exchanges in India used to take place through open outcry without use of 
information technology for immediate matching or recording of trades. This was time consuming 
and inefficient. This imposed limits on trading volumes and efficiency. In order to provide 
efficiency, liquidity and transparency, NSE introduced a nationwide, on-line, fully-automated 
screen based trading system (SBTS) where a member can punch into the computer the quantities 
of a security and the price at which he would like to transact, and the transaction is executed as 
soon as a matching sale or buy order from a counter party is found.
NSE is the first exchange in the world to use satellite communication technology for trading. Its 
trading system, called National Exchange for Automated Trading (NEAT), is a state of-the-art 
client server based application. At the server end all trading information is stored in an in-
memory database to achieve minimum response time and maximum system availability for 
users. It has uptime record of 99.7%. For all trades entered into NEAT system, there is uniform 
response time of less than one second.
You may go to the broker’s office or place an order on the phone/internet or as defined in the 
Model Agreement, which every client needs to enter into with his or her broker.
There are many brokers of the NSE who provide internet based trading facility to their clients. 
Internet based trading enables an investor to buy/sell securities through internet which can be 
accessed from a computer at the investor’s residence or anywhere else where the client can 
access the internet. Investors need to get in touch with an NSE broker providing this service to 
avail of internet based trading facility.
Contract Note is a confirmation of trades done on a particular day on behalf of the client by a 
trading member. It imposes a legally enforceable relationship between the client and the trading 
member with respect to purchase/sale and settlement of trades. It also helps to settle 
disputes/claims between the investor and the trading member. It is a prerequisite for filing a 
complaint or arbitration proceeding against the trading member in case of a dispute. A valid 
contract note should be in the prescribed form, contain the details of trades, stamped with 
requisite value and duly signed by the authorized signatory. Contract notes are kept in duplicate, 
the trading member and the client should keep one copy each. After verifying the details 
contained therein, the client keeps one copy and returns the second copy to the trading member 
duly acknowledged by him.
A broker has to issue a contract note to clients for all transactions in the form specified by the 
stock exchange. The contract note inter-alia should have following:
Introduction to Financial Markets
21
Page 2


4.1 Introduction
4.1.1 Stock Exchange
What is meant by Secondary market?
What is the role of the Secondary Market?
What is the difference between the Primary Market and the Secondary Market?
What is the role of a Stock Exchange in buying and selling shares?
What is Demutualisation of stock exchanges?
How is a demutualised exchange different from a mutual exchange?
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.
For the general investor, the secondary market provides an efficient platform for trading of his 
securities. For the management of the company, Secondary equity markets serve as a monitoring 
and control conduit—by facilitating value-enhancing control activities, enabling implementation 
of incentive-based management contracts, and aggregating information (via price discovery) that 
guides management decisions.
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 venue in which already existing/pre-
issued securities are traded among 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.
The stock exchanges in India, under the overall supervision of the regulatory authority, the 
Securities and Exchange Board of India (SEBI), provide a trading platform, where buyers and 
sellers can meet to transact in securities. The trading platform provided by NSE is an electronic 
one and there is no need for buyers and sellers to meet at a physical location to trade. They can 
trade through the computerized trading screens available with the NSE trading members or the 
internet based trading facility provided by the trading members of NSE.
Demutualisation refers to the legal structure of an exchange whereby the ownership, the 
management and the trading rights at the exchange are segregated from one another.
In a mutual exchange, the three functions of ownership, management and trading are 
concentrated into a single Group. Here, the broker members of the exchange are both the owners 
and the traders on the exchange and they further manage the exchange as well. This at times can 
lead to conflicts of interest in decision making. A demutualised exchange, on the other hand, has 
all these three functions clearly segregated, i.e. the ownership, management and trading are in 
separate hands.
SECONDARY MARKET
Chapter 4
4.1.2 Stock Trading
What is Screen Based Trading?
What is NEAT?
How to place orders with the broker?
How does an investor get access to internet based trading facility?
What is a Contract Note?
What details are required to be mentioned on the contract note issued by the stock 
broker?
The trading on stock exchanges in India used to take place through open outcry without use of 
information technology for immediate matching or recording of trades. This was time consuming 
and inefficient. This imposed limits on trading volumes and efficiency. In order to provide 
efficiency, liquidity and transparency, NSE introduced a nationwide, on-line, fully-automated 
screen based trading system (SBTS) where a member can punch into the computer the quantities 
of a security and the price at which he would like to transact, and the transaction is executed as 
soon as a matching sale or buy order from a counter party is found.
NSE is the first exchange in the world to use satellite communication technology for trading. Its 
trading system, called National Exchange for Automated Trading (NEAT), is a state of-the-art 
client server based application. At the server end all trading information is stored in an in-
memory database to achieve minimum response time and maximum system availability for 
users. It has uptime record of 99.7%. For all trades entered into NEAT system, there is uniform 
response time of less than one second.
You may go to the broker’s office or place an order on the phone/internet or as defined in the 
Model Agreement, which every client needs to enter into with his or her broker.
There are many brokers of the NSE who provide internet based trading facility to their clients. 
Internet based trading enables an investor to buy/sell securities through internet which can be 
accessed from a computer at the investor’s residence or anywhere else where the client can 
access the internet. Investors need to get in touch with an NSE broker providing this service to 
avail of internet based trading facility.
Contract Note is a confirmation of trades done on a particular day on behalf of the client by a 
trading member. It imposes a legally enforceable relationship between the client and the trading 
member with respect to purchase/sale and settlement of trades. It also helps to settle 
disputes/claims between the investor and the trading member. It is a prerequisite for filing a 
complaint or arbitration proceeding against the trading member in case of a dispute. A valid 
contract note should be in the prescribed form, contain the details of trades, stamped with 
requisite value and duly signed by the authorized signatory. Contract notes are kept in duplicate, 
the trading member and the client should keep one copy each. After verifying the details 
contained therein, the client keeps one copy and returns the second copy to the trading member 
duly acknowledged by him.
A broker has to issue a contract note to clients for all transactions in the form specified by the 
stock exchange. The contract note inter-alia should have following:
Introduction to Financial Markets
21
4.1 Introduction
4.1.1 Stock Exchange
What is meant by Secondary market?
What is the role of the Secondary Market?
What is the difference between the Primary Market and the Secondary Market?
What is the role of a Stock Exchange in buying and selling shares?
What is Demutualisation of stock exchanges?
How is a demutualised exchange different from a mutual exchange?
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.
For the general investor, the secondary market provides an efficient platform for trading of his 
securities. For the management of the company, Secondary equity markets serve as a monitoring 
and control conduit—by facilitating value-enhancing control activities, enabling implementation 
of incentive-based management contracts, and aggregating information (via price discovery) that 
guides management decisions.
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 venue in which already existing/pre-
issued securities are traded among 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.
The stock exchanges in India, under the overall supervision of the regulatory authority, the 
Securities and Exchange Board of India (SEBI), provide a trading platform, where buyers and 
sellers can meet to transact in securities. The trading platform provided by NSE is an electronic 
one and there is no need for buyers and sellers to meet at a physical location to trade. They can 
trade through the computerized trading screens available with the NSE trading members or the 
internet based trading facility provided by the trading members of NSE.
Demutualisation refers to the legal structure of an exchange whereby the ownership, the 
management and the trading rights at the exchange are segregated from one another.
In a mutual exchange, the three functions of ownership, management and trading are 
concentrated into a single Group. Here, the broker members of the exchange are both the owners 
and the traders on the exchange and they further manage the exchange as well. This at times can 
lead to conflicts of interest in decision making. A demutualised exchange, on the other hand, has 
all these three functions clearly segregated, i.e. the ownership, management and trading are in 
separate hands.
SECONDARY MARKET
Chapter 4
4.1.2 Stock Trading
What is Screen Based Trading?
What is NEAT?
How to place orders with the broker?
How does an investor get access to internet based trading facility?
What is a Contract Note?
What details are required to be mentioned on the contract note issued by the stock 
broker?
The trading on stock exchanges in India used to take place through open outcry without use of 
information technology for immediate matching or recording of trades. This was time consuming 
and inefficient. This imposed limits on trading volumes and efficiency. In order to provide 
efficiency, liquidity and transparency, NSE introduced a nationwide, on-line, fully-automated 
screen based trading system (SBTS) where a member can punch into the computer the quantities 
of a security and the price at which he would like to transact, and the transaction is executed as 
soon as a matching sale or buy order from a counter party is found.
NSE is the first exchange in the world to use satellite communication technology for trading. Its 
trading system, called National Exchange for Automated Trading (NEAT), is a state of-the-art 
client server based application. At the server end all trading information is stored in an in-
memory database to achieve minimum response time and maximum system availability for 
users. It has uptime record of 99.7%. For all trades entered into NEAT system, there is uniform 
response time of less than one second.
You may go to the broker’s office or place an order on the phone/internet or as defined in the 
Model Agreement, which every client needs to enter into with his or her broker.
There are many brokers of the NSE who provide internet based trading facility to their clients. 
Internet based trading enables an investor to buy/sell securities through internet which can be 
accessed from a computer at the investor’s residence or anywhere else where the client can 
access the internet. Investors need to get in touch with an NSE broker providing this service to 
avail of internet based trading facility.
Contract Note is a confirmation of trades done on a particular day on behalf of the client by a 
trading member. It imposes a legally enforceable relationship between the client and the trading 
member with respect to purchase/sale and settlement of trades. It also helps to settle 
disputes/claims between the investor and the trading member. It is a prerequisite for filing a 
complaint or arbitration proceeding against the trading member in case of a dispute. A valid 
contract note should be in the prescribed form, contain the details of trades, stamped with 
requisite value and duly signed by the authorized signatory. Contract notes are kept in duplicate, 
the trading member and the client should keep one copy each. After verifying the details 
contained therein, the client keeps one copy and returns the second copy to the trading member 
duly acknowledged by him.
A broker has to issue a contract note to clients for all transactions in the form specified by the 
stock exchange. The contract note inter-alia should have following:
20
Page 3


4.1 Introduction
4.1.1 Stock Exchange
What is meant by Secondary market?
What is the role of the Secondary Market?
What is the difference between the Primary Market and the Secondary Market?
What is the role of a Stock Exchange in buying and selling shares?
What is Demutualisation of stock exchanges?
How is a demutualised exchange different from a mutual exchange?
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.
For the general investor, the secondary market provides an efficient platform for trading of his 
securities. For the management of the company, Secondary equity markets serve as a monitoring 
and control conduit—by facilitating value-enhancing control activities, enabling implementation 
of incentive-based management contracts, and aggregating information (via price discovery) that 
guides management decisions.
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 venue in which already existing/pre-
issued securities are traded among 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.
The stock exchanges in India, under the overall supervision of the regulatory authority, the 
Securities and Exchange Board of India (SEBI), provide a trading platform, where buyers and 
sellers can meet to transact in securities. The trading platform provided by NSE is an electronic 
one and there is no need for buyers and sellers to meet at a physical location to trade. They can 
trade through the computerized trading screens available with the NSE trading members or the 
internet based trading facility provided by the trading members of NSE.
Demutualisation refers to the legal structure of an exchange whereby the ownership, the 
management and the trading rights at the exchange are segregated from one another.
In a mutual exchange, the three functions of ownership, management and trading are 
concentrated into a single Group. Here, the broker members of the exchange are both the owners 
and the traders on the exchange and they further manage the exchange as well. This at times can 
lead to conflicts of interest in decision making. A demutualised exchange, on the other hand, has 
all these three functions clearly segregated, i.e. the ownership, management and trading are in 
separate hands.
SECONDARY MARKET
Chapter 4
4.1.2 Stock Trading
What is Screen Based Trading?
What is NEAT?
How to place orders with the broker?
How does an investor get access to internet based trading facility?
What is a Contract Note?
What details are required to be mentioned on the contract note issued by the stock 
broker?
The trading on stock exchanges in India used to take place through open outcry without use of 
information technology for immediate matching or recording of trades. This was time consuming 
and inefficient. This imposed limits on trading volumes and efficiency. In order to provide 
efficiency, liquidity and transparency, NSE introduced a nationwide, on-line, fully-automated 
screen based trading system (SBTS) where a member can punch into the computer the quantities 
of a security and the price at which he would like to transact, and the transaction is executed as 
soon as a matching sale or buy order from a counter party is found.
NSE is the first exchange in the world to use satellite communication technology for trading. Its 
trading system, called National Exchange for Automated Trading (NEAT), is a state of-the-art 
client server based application. At the server end all trading information is stored in an in-
memory database to achieve minimum response time and maximum system availability for 
users. It has uptime record of 99.7%. For all trades entered into NEAT system, there is uniform 
response time of less than one second.
You may go to the broker’s office or place an order on the phone/internet or as defined in the 
Model Agreement, which every client needs to enter into with his or her broker.
There are many brokers of the NSE who provide internet based trading facility to their clients. 
Internet based trading enables an investor to buy/sell securities through internet which can be 
accessed from a computer at the investor’s residence or anywhere else where the client can 
access the internet. Investors need to get in touch with an NSE broker providing this service to 
avail of internet based trading facility.
Contract Note is a confirmation of trades done on a particular day on behalf of the client by a 
trading member. It imposes a legally enforceable relationship between the client and the trading 
member with respect to purchase/sale and settlement of trades. It also helps to settle 
disputes/claims between the investor and the trading member. It is a prerequisite for filing a 
complaint or arbitration proceeding against the trading member in case of a dispute. A valid 
contract note should be in the prescribed form, contain the details of trades, stamped with 
requisite value and duly signed by the authorized signatory. Contract notes are kept in duplicate, 
the trading member and the client should keep one copy each. After verifying the details 
contained therein, the client keeps one copy and returns the second copy to the trading member 
duly acknowledged by him.
A broker has to issue a contract note to clients for all transactions in the form specified by the 
stock exchange. The contract note inter-alia should have following:
Introduction to Financial Markets
21
4.1 Introduction
4.1.1 Stock Exchange
What is meant by Secondary market?
What is the role of the Secondary Market?
What is the difference between the Primary Market and the Secondary Market?
What is the role of a Stock Exchange in buying and selling shares?
What is Demutualisation of stock exchanges?
How is a demutualised exchange different from a mutual exchange?
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.
For the general investor, the secondary market provides an efficient platform for trading of his 
securities. For the management of the company, Secondary equity markets serve as a monitoring 
and control conduit—by facilitating value-enhancing control activities, enabling implementation 
of incentive-based management contracts, and aggregating information (via price discovery) that 
guides management decisions.
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 venue in which already existing/pre-
issued securities are traded among 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.
The stock exchanges in India, under the overall supervision of the regulatory authority, the 
Securities and Exchange Board of India (SEBI), provide a trading platform, where buyers and 
sellers can meet to transact in securities. The trading platform provided by NSE is an electronic 
one and there is no need for buyers and sellers to meet at a physical location to trade. They can 
trade through the computerized trading screens available with the NSE trading members or the 
internet based trading facility provided by the trading members of NSE.
Demutualisation refers to the legal structure of an exchange whereby the ownership, the 
management and the trading rights at the exchange are segregated from one another.
In a mutual exchange, the three functions of ownership, management and trading are 
concentrated into a single Group. Here, the broker members of the exchange are both the owners 
and the traders on the exchange and they further manage the exchange as well. This at times can 
lead to conflicts of interest in decision making. A demutualised exchange, on the other hand, has 
all these three functions clearly segregated, i.e. the ownership, management and trading are in 
separate hands.
SECONDARY MARKET
Chapter 4
4.1.2 Stock Trading
What is Screen Based Trading?
What is NEAT?
How to place orders with the broker?
How does an investor get access to internet based trading facility?
What is a Contract Note?
What details are required to be mentioned on the contract note issued by the stock 
broker?
The trading on stock exchanges in India used to take place through open outcry without use of 
information technology for immediate matching or recording of trades. This was time consuming 
and inefficient. This imposed limits on trading volumes and efficiency. In order to provide 
efficiency, liquidity and transparency, NSE introduced a nationwide, on-line, fully-automated 
screen based trading system (SBTS) where a member can punch into the computer the quantities 
of a security and the price at which he would like to transact, and the transaction is executed as 
soon as a matching sale or buy order from a counter party is found.
NSE is the first exchange in the world to use satellite communication technology for trading. Its 
trading system, called National Exchange for Automated Trading (NEAT), is a state of-the-art 
client server based application. At the server end all trading information is stored in an in-
memory database to achieve minimum response time and maximum system availability for 
users. It has uptime record of 99.7%. For all trades entered into NEAT system, there is uniform 
response time of less than one second.
You may go to the broker’s office or place an order on the phone/internet or as defined in the 
Model Agreement, which every client needs to enter into with his or her broker.
There are many brokers of the NSE who provide internet based trading facility to their clients. 
Internet based trading enables an investor to buy/sell securities through internet which can be 
accessed from a computer at the investor’s residence or anywhere else where the client can 
access the internet. Investors need to get in touch with an NSE broker providing this service to 
avail of internet based trading facility.
Contract Note is a confirmation of trades done on a particular day on behalf of the client by a 
trading member. It imposes a legally enforceable relationship between the client and the trading 
member with respect to purchase/sale and settlement of trades. It also helps to settle 
disputes/claims between the investor and the trading member. It is a prerequisite for filing a 
complaint or arbitration proceeding against the trading member in case of a dispute. A valid 
contract note should be in the prescribed form, contain the details of trades, stamped with 
requisite value and duly signed by the authorized signatory. Contract notes are kept in duplicate, 
the trading member and the client should keep one copy each. After verifying the details 
contained therein, the client keeps one copy and returns the second copy to the trading member 
duly acknowledged by him.
A broker has to issue a contract note to clients for all transactions in the form specified by the 
stock exchange. The contract note inter-alia should have following:
20
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
Name, address and SEBI Registration number of the Member broker.
Name of Partner/Proprietor/Authorised Signatory.
Dealing Office Address/Tel. No./Fax no., Code number of the member given by the Exchange.
Contract number, date of issue of contract note, settlement number and time period for 
settlement.
Constituent (Client) name/Code Number.
Order number and order time corresponding to the trades.
Trade number and Trade time.
Quantity and kind of security bought/sold by the client.
Brokerage and Purchase/Sale rate.
Service tax rates, Securities Transaction Tax and any other charges levied by the broker.
Appropriate stamps have to be affixed on the contract note or it is mentioned that the 
consolidated stamp duty is paid.
Signature of the Stock Broker/Authorized Signatory.
The maximum brokerage that can be charged by a broker from his clients as commission cannot 
be more than 2.5% of the value mentioned in the respective purchase or sale note.
An investor does not get any protection if he trades outside a stock exchange. Trading at the 
exchange offers investors the best prices prevailing at the time in the market, lack of any counter-
party risk which is assumed by the clearing corporation, access to investor grievance and 
redressal mechanism of stock exchanges, protection upto a prescribed limit, from the Investor 
Protection Fund etc.
One can confirm it by verifying the registration certificate issued by SEBI. A broker’s registration 
number begins with the letters ‘INB’ and that of a sub broker with the letters ‘INS’.
Here are some useful pointers to bear in mind before you invest in the markets:
Make sure your broker is registered with SEBI and the exchanges and do not deal with 
unregistered intermediaries.
Ensure that you receive contract notes for all your transactions from your broker within one 
working day of execution of the trades.
All investments carry risk of some kind. Investors should always know the risk that they are 
taking and invest in a manner that matches their risk tolerance.
Do not be misled by market rumours, during advertisement or ‘hot tips’ of the day.
Take informed decisions by studying the fundamentals of the company. Find out the 
business the company is into, its future prospects, quality of management, past track record 
What is the maximum brokerage that a broker can charge?
Why should one trade on a recognized stock exchange only for buying/selling shares?
How to know if the broker or sub broker is registered?
What precautions must one take before investing in the stock markets?
etc Sources of knowing about a company are through annual reports, economic magazines, 
databases available with vendors or your financial advisor.
If your financial advisor or broker advises you to invest in a company you have never heard 
of, be cautious. Spend some time checking out about the company before investing.
Do not be attracted by announcements of fantastic results/news reports, about a company. 
Do your own research before investing in any stock.
Do not be attracted to stocks based on what an internet website promotes, unless you have 
done adequate study of the company.
Investing in very low priced stocks or what are known as penny stocks does not guarantee 
high returns.
Be cautious about stocks which show a sudden spurt in price or trading activity.
Any advise or tip that claims that there are huge returns expected, especially for acting 
quickly, may be risky and may to lead to losing some, most, or all of your money.
Ensure that the intermediary (broker/sub-broker) has a valid SEBI registration certificate.
Enter into an agreement with your broker/sub-broker setting out terms and conditions 
clearly.
Ensure that you give all your details in the ‘Know Your Client’ form.
Ensure that you read carefully and understand the contents of the ‘Risk Disclosure 
Document’ and then acknowledge it.
Insist on a contract note issued by your broker only, for trades done each day.
Ensure that you receive the contract note from your broker within 24 hours of the 
transaction.
Ensure that the contract note contains details such as the broker’s name, trade time and 
number, transaction price, brokerage, service tax, securities transaction tax etc. and is 
signed by the Authorised Signatory of the broker.
To cross check genuineness of the transactions, log in to the NSE website 
(www.nseindia.com) and go to the ‘trade verification’ facility extended by NSE. Issue 
account payee cheques/demand drafts in the name of your broker only, as it appears on the 
contract note/SEBI registration certificate of the broker.
While delivering shares to your broker to meet your obligations, ensure that the delivery 
instructions are made only to the designated account of your broker only.
Insist on periodical statement of accounts of funds and securities from your broker. Cross 
check and reconcile your accounts promptly and in case of any discrepancies bring it to the 
attention of your broker immediately.
Please ensure that you receive payments/deliveries from your broker, for the transactions entered 
by you, within one working day of the payout date.
Ensure that you do not undertake deals on behalf of others or trade on your own name and 
then issue cheques from a family members’/ friends’ bank accounts.
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
What Do’s and Don’ts should an investor bear in mind when investing in the stock 
markets?
Introduction to Financial Markets
23
Page 4


4.1 Introduction
4.1.1 Stock Exchange
What is meant by Secondary market?
What is the role of the Secondary Market?
What is the difference between the Primary Market and the Secondary Market?
What is the role of a Stock Exchange in buying and selling shares?
What is Demutualisation of stock exchanges?
How is a demutualised exchange different from a mutual exchange?
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.
For the general investor, the secondary market provides an efficient platform for trading of his 
securities. For the management of the company, Secondary equity markets serve as a monitoring 
and control conduit—by facilitating value-enhancing control activities, enabling implementation 
of incentive-based management contracts, and aggregating information (via price discovery) that 
guides management decisions.
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 venue in which already existing/pre-
issued securities are traded among 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.
The stock exchanges in India, under the overall supervision of the regulatory authority, the 
Securities and Exchange Board of India (SEBI), provide a trading platform, where buyers and 
sellers can meet to transact in securities. The trading platform provided by NSE is an electronic 
one and there is no need for buyers and sellers to meet at a physical location to trade. They can 
trade through the computerized trading screens available with the NSE trading members or the 
internet based trading facility provided by the trading members of NSE.
Demutualisation refers to the legal structure of an exchange whereby the ownership, the 
management and the trading rights at the exchange are segregated from one another.
In a mutual exchange, the three functions of ownership, management and trading are 
concentrated into a single Group. Here, the broker members of the exchange are both the owners 
and the traders on the exchange and they further manage the exchange as well. This at times can 
lead to conflicts of interest in decision making. A demutualised exchange, on the other hand, has 
all these three functions clearly segregated, i.e. the ownership, management and trading are in 
separate hands.
SECONDARY MARKET
Chapter 4
4.1.2 Stock Trading
What is Screen Based Trading?
What is NEAT?
How to place orders with the broker?
How does an investor get access to internet based trading facility?
What is a Contract Note?
What details are required to be mentioned on the contract note issued by the stock 
broker?
The trading on stock exchanges in India used to take place through open outcry without use of 
information technology for immediate matching or recording of trades. This was time consuming 
and inefficient. This imposed limits on trading volumes and efficiency. In order to provide 
efficiency, liquidity and transparency, NSE introduced a nationwide, on-line, fully-automated 
screen based trading system (SBTS) where a member can punch into the computer the quantities 
of a security and the price at which he would like to transact, and the transaction is executed as 
soon as a matching sale or buy order from a counter party is found.
NSE is the first exchange in the world to use satellite communication technology for trading. Its 
trading system, called National Exchange for Automated Trading (NEAT), is a state of-the-art 
client server based application. At the server end all trading information is stored in an in-
memory database to achieve minimum response time and maximum system availability for 
users. It has uptime record of 99.7%. For all trades entered into NEAT system, there is uniform 
response time of less than one second.
You may go to the broker’s office or place an order on the phone/internet or as defined in the 
Model Agreement, which every client needs to enter into with his or her broker.
There are many brokers of the NSE who provide internet based trading facility to their clients. 
Internet based trading enables an investor to buy/sell securities through internet which can be 
accessed from a computer at the investor’s residence or anywhere else where the client can 
access the internet. Investors need to get in touch with an NSE broker providing this service to 
avail of internet based trading facility.
Contract Note is a confirmation of trades done on a particular day on behalf of the client by a 
trading member. It imposes a legally enforceable relationship between the client and the trading 
member with respect to purchase/sale and settlement of trades. It also helps to settle 
disputes/claims between the investor and the trading member. It is a prerequisite for filing a 
complaint or arbitration proceeding against the trading member in case of a dispute. A valid 
contract note should be in the prescribed form, contain the details of trades, stamped with 
requisite value and duly signed by the authorized signatory. Contract notes are kept in duplicate, 
the trading member and the client should keep one copy each. After verifying the details 
contained therein, the client keeps one copy and returns the second copy to the trading member 
duly acknowledged by him.
A broker has to issue a contract note to clients for all transactions in the form specified by the 
stock exchange. The contract note inter-alia should have following:
Introduction to Financial Markets
21
4.1 Introduction
4.1.1 Stock Exchange
What is meant by Secondary market?
What is the role of the Secondary Market?
What is the difference between the Primary Market and the Secondary Market?
What is the role of a Stock Exchange in buying and selling shares?
What is Demutualisation of stock exchanges?
How is a demutualised exchange different from a mutual exchange?
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.
For the general investor, the secondary market provides an efficient platform for trading of his 
securities. For the management of the company, Secondary equity markets serve as a monitoring 
and control conduit—by facilitating value-enhancing control activities, enabling implementation 
of incentive-based management contracts, and aggregating information (via price discovery) that 
guides management decisions.
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 venue in which already existing/pre-
issued securities are traded among 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.
The stock exchanges in India, under the overall supervision of the regulatory authority, the 
Securities and Exchange Board of India (SEBI), provide a trading platform, where buyers and 
sellers can meet to transact in securities. The trading platform provided by NSE is an electronic 
one and there is no need for buyers and sellers to meet at a physical location to trade. They can 
trade through the computerized trading screens available with the NSE trading members or the 
internet based trading facility provided by the trading members of NSE.
Demutualisation refers to the legal structure of an exchange whereby the ownership, the 
management and the trading rights at the exchange are segregated from one another.
In a mutual exchange, the three functions of ownership, management and trading are 
concentrated into a single Group. Here, the broker members of the exchange are both the owners 
and the traders on the exchange and they further manage the exchange as well. This at times can 
lead to conflicts of interest in decision making. A demutualised exchange, on the other hand, has 
all these three functions clearly segregated, i.e. the ownership, management and trading are in 
separate hands.
SECONDARY MARKET
Chapter 4
4.1.2 Stock Trading
What is Screen Based Trading?
What is NEAT?
How to place orders with the broker?
How does an investor get access to internet based trading facility?
What is a Contract Note?
What details are required to be mentioned on the contract note issued by the stock 
broker?
The trading on stock exchanges in India used to take place through open outcry without use of 
information technology for immediate matching or recording of trades. This was time consuming 
and inefficient. This imposed limits on trading volumes and efficiency. In order to provide 
efficiency, liquidity and transparency, NSE introduced a nationwide, on-line, fully-automated 
screen based trading system (SBTS) where a member can punch into the computer the quantities 
of a security and the price at which he would like to transact, and the transaction is executed as 
soon as a matching sale or buy order from a counter party is found.
NSE is the first exchange in the world to use satellite communication technology for trading. Its 
trading system, called National Exchange for Automated Trading (NEAT), is a state of-the-art 
client server based application. At the server end all trading information is stored in an in-
memory database to achieve minimum response time and maximum system availability for 
users. It has uptime record of 99.7%. For all trades entered into NEAT system, there is uniform 
response time of less than one second.
You may go to the broker’s office or place an order on the phone/internet or as defined in the 
Model Agreement, which every client needs to enter into with his or her broker.
There are many brokers of the NSE who provide internet based trading facility to their clients. 
Internet based trading enables an investor to buy/sell securities through internet which can be 
accessed from a computer at the investor’s residence or anywhere else where the client can 
access the internet. Investors need to get in touch with an NSE broker providing this service to 
avail of internet based trading facility.
Contract Note is a confirmation of trades done on a particular day on behalf of the client by a 
trading member. It imposes a legally enforceable relationship between the client and the trading 
member with respect to purchase/sale and settlement of trades. It also helps to settle 
disputes/claims between the investor and the trading member. It is a prerequisite for filing a 
complaint or arbitration proceeding against the trading member in case of a dispute. A valid 
contract note should be in the prescribed form, contain the details of trades, stamped with 
requisite value and duly signed by the authorized signatory. Contract notes are kept in duplicate, 
the trading member and the client should keep one copy each. After verifying the details 
contained therein, the client keeps one copy and returns the second copy to the trading member 
duly acknowledged by him.
A broker has to issue a contract note to clients for all transactions in the form specified by the 
stock exchange. The contract note inter-alia should have following:
20
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
Name, address and SEBI Registration number of the Member broker.
Name of Partner/Proprietor/Authorised Signatory.
Dealing Office Address/Tel. No./Fax no., Code number of the member given by the Exchange.
Contract number, date of issue of contract note, settlement number and time period for 
settlement.
Constituent (Client) name/Code Number.
Order number and order time corresponding to the trades.
Trade number and Trade time.
Quantity and kind of security bought/sold by the client.
Brokerage and Purchase/Sale rate.
Service tax rates, Securities Transaction Tax and any other charges levied by the broker.
Appropriate stamps have to be affixed on the contract note or it is mentioned that the 
consolidated stamp duty is paid.
Signature of the Stock Broker/Authorized Signatory.
The maximum brokerage that can be charged by a broker from his clients as commission cannot 
be more than 2.5% of the value mentioned in the respective purchase or sale note.
An investor does not get any protection if he trades outside a stock exchange. Trading at the 
exchange offers investors the best prices prevailing at the time in the market, lack of any counter-
party risk which is assumed by the clearing corporation, access to investor grievance and 
redressal mechanism of stock exchanges, protection upto a prescribed limit, from the Investor 
Protection Fund etc.
One can confirm it by verifying the registration certificate issued by SEBI. A broker’s registration 
number begins with the letters ‘INB’ and that of a sub broker with the letters ‘INS’.
Here are some useful pointers to bear in mind before you invest in the markets:
Make sure your broker is registered with SEBI and the exchanges and do not deal with 
unregistered intermediaries.
Ensure that you receive contract notes for all your transactions from your broker within one 
working day of execution of the trades.
All investments carry risk of some kind. Investors should always know the risk that they are 
taking and invest in a manner that matches their risk tolerance.
Do not be misled by market rumours, during advertisement or ‘hot tips’ of the day.
Take informed decisions by studying the fundamentals of the company. Find out the 
business the company is into, its future prospects, quality of management, past track record 
What is the maximum brokerage that a broker can charge?
Why should one trade on a recognized stock exchange only for buying/selling shares?
How to know if the broker or sub broker is registered?
What precautions must one take before investing in the stock markets?
etc Sources of knowing about a company are through annual reports, economic magazines, 
databases available with vendors or your financial advisor.
If your financial advisor or broker advises you to invest in a company you have never heard 
of, be cautious. Spend some time checking out about the company before investing.
Do not be attracted by announcements of fantastic results/news reports, about a company. 
Do your own research before investing in any stock.
Do not be attracted to stocks based on what an internet website promotes, unless you have 
done adequate study of the company.
Investing in very low priced stocks or what are known as penny stocks does not guarantee 
high returns.
Be cautious about stocks which show a sudden spurt in price or trading activity.
Any advise or tip that claims that there are huge returns expected, especially for acting 
quickly, may be risky and may to lead to losing some, most, or all of your money.
Ensure that the intermediary (broker/sub-broker) has a valid SEBI registration certificate.
Enter into an agreement with your broker/sub-broker setting out terms and conditions 
clearly.
Ensure that you give all your details in the ‘Know Your Client’ form.
Ensure that you read carefully and understand the contents of the ‘Risk Disclosure 
Document’ and then acknowledge it.
Insist on a contract note issued by your broker only, for trades done each day.
Ensure that you receive the contract note from your broker within 24 hours of the 
transaction.
Ensure that the contract note contains details such as the broker’s name, trade time and 
number, transaction price, brokerage, service tax, securities transaction tax etc. and is 
signed by the Authorised Signatory of the broker.
To cross check genuineness of the transactions, log in to the NSE website 
(www.nseindia.com) and go to the ‘trade verification’ facility extended by NSE. Issue 
account payee cheques/demand drafts in the name of your broker only, as it appears on the 
contract note/SEBI registration certificate of the broker.
While delivering shares to your broker to meet your obligations, ensure that the delivery 
instructions are made only to the designated account of your broker only.
Insist on periodical statement of accounts of funds and securities from your broker. Cross 
check and reconcile your accounts promptly and in case of any discrepancies bring it to the 
attention of your broker immediately.
Please ensure that you receive payments/deliveries from your broker, for the transactions entered 
by you, within one working day of the payout date.
Ensure that you do not undertake deals on behalf of others or trade on your own name and 
then issue cheques from a family members’/ friends’ bank accounts.
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
What Do’s and Don’ts should an investor bear in mind when investing in the stock 
markets?
Introduction to Financial Markets
23
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
Name, address and SEBI Registration number of the Member broker.
Name of Partner/Proprietor/Authorised Signatory.
Dealing Office Address/Tel. No./Fax no., Code number of the member given by the Exchange.
Contract number, date of issue of contract note, settlement number and time period for 
settlement.
Constituent (Client) name/Code Number.
Order number and order time corresponding to the trades.
Trade number and Trade time.
Quantity and kind of security bought/sold by the client.
Brokerage and Purchase/Sale rate.
Service tax rates, Securities Transaction Tax and any other charges levied by the broker.
Appropriate stamps have to be affixed on the contract note or it is mentioned that the 
consolidated stamp duty is paid.
Signature of the Stock Broker/Authorized Signatory.
The maximum brokerage that can be charged by a broker from his clients as commission cannot 
be more than 2.5% of the value mentioned in the respective purchase or sale note.
An investor does not get any protection if he trades outside a stock exchange. Trading at the 
exchange offers investors the best prices prevailing at the time in the market, lack of any counter-
party risk which is assumed by the clearing corporation, access to investor grievance and 
redressal mechanism of stock exchanges, protection upto a prescribed limit, from the Investor 
Protection Fund etc.
One can confirm it by verifying the registration certificate issued by SEBI. A broker’s registration 
number begins with the letters ‘INB’ and that of a sub broker with the letters ‘INS’.
Here are some useful pointers to bear in mind before you invest in the markets:
Make sure your broker is registered with SEBI and the exchanges and do not deal with 
unregistered intermediaries.
Ensure that you receive contract notes for all your transactions from your broker within one 
working day of execution of the trades.
All investments carry risk of some kind. Investors should always know the risk that they are 
taking and invest in a manner that matches their risk tolerance.
Do not be misled by market rumours, during advertisement or ‘hot tips’ of the day.
Take informed decisions by studying the fundamentals of the company. Find out the 
business the company is into, its future prospects, quality of management, past track record 
What is the maximum brokerage that a broker can charge?
Why should one trade on a recognized stock exchange only for buying/selling shares?
How to know if the broker or sub broker is registered?
What precautions must one take before investing in the stock markets?
etc Sources of knowing about a company are through annual reports, economic magazines, 
databases available with vendors or your financial advisor.
If your financial advisor or broker advises you to invest in a company you have never heard 
of, be cautious. Spend some time checking out about the company before investing.
Do not be attracted by announcements of fantastic results/news reports, about a company. 
Do your own research before investing in any stock.
Do not be attracted to stocks based on what an internet website promotes, unless you have 
done adequate study of the company.
Investing in very low priced stocks or what are known as penny stocks does not guarantee 
high returns.
Be cautious about stocks which show a sudden spurt in price or trading activity.
Any advise or tip that claims that there are huge returns expected, especially for acting 
quickly, may be risky and may to lead to losing some, most, or all of your money.
Ensure that the intermediary (broker/sub-broker) has a valid SEBI registration certificate.
Enter into an agreement with your broker/sub-broker setting out terms and conditions 
clearly.
Ensure that you give all your details in the ‘Know Your Client’ form.
Ensure that you read carefully and understand the contents of the ‘Risk Disclosure 
Document’ and then acknowledge it.
Insist on a contract note issued by your broker only, for trades done each day.
Ensure that you receive the contract note from your broker within 24 hours of the 
transaction.
Ensure that the contract note contains details such as the broker’s name, trade time and 
number, transaction price, brokerage, service tax, securities transaction tax etc. and is 
signed by the Authorised Signatory of the broker.
To cross check genuineness of the transactions, log in to the NSE website 
(www.nseindia.com) and go to the ‘trade verification’ facility extended by NSE. Issue 
account payee cheques/demand drafts in the name of your broker only, as it appears on the 
contract note/SEBI registration certificate of the broker.
While delivering shares to your broker to meet your obligations, ensure that the delivery 
instructions are made only to the designated account of your broker only.
Insist on periodical statement of accounts of funds and securities from your broker. Cross 
check and reconcile your accounts promptly and in case of any discrepancies bring it to the 
attention of your broker immediately.
Please ensure that you receive payments/deliveries from your broker, for the transactions entered 
by you, within one working day of the payout date.
Ensure that you do not undertake deals on behalf of others or trade on your own name and 
then issue cheques from a family members’/ friends’ bank accounts.
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
What Do’s and Don’ts should an investor bear in mind when investing in the stock 
markets?
22
Page 5


4.1 Introduction
4.1.1 Stock Exchange
What is meant by Secondary market?
What is the role of the Secondary Market?
What is the difference between the Primary Market and the Secondary Market?
What is the role of a Stock Exchange in buying and selling shares?
What is Demutualisation of stock exchanges?
How is a demutualised exchange different from a mutual exchange?
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.
For the general investor, the secondary market provides an efficient platform for trading of his 
securities. For the management of the company, Secondary equity markets serve as a monitoring 
and control conduit—by facilitating value-enhancing control activities, enabling implementation 
of incentive-based management contracts, and aggregating information (via price discovery) that 
guides management decisions.
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 venue in which already existing/pre-
issued securities are traded among 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.
The stock exchanges in India, under the overall supervision of the regulatory authority, the 
Securities and Exchange Board of India (SEBI), provide a trading platform, where buyers and 
sellers can meet to transact in securities. The trading platform provided by NSE is an electronic 
one and there is no need for buyers and sellers to meet at a physical location to trade. They can 
trade through the computerized trading screens available with the NSE trading members or the 
internet based trading facility provided by the trading members of NSE.
Demutualisation refers to the legal structure of an exchange whereby the ownership, the 
management and the trading rights at the exchange are segregated from one another.
In a mutual exchange, the three functions of ownership, management and trading are 
concentrated into a single Group. Here, the broker members of the exchange are both the owners 
and the traders on the exchange and they further manage the exchange as well. This at times can 
lead to conflicts of interest in decision making. A demutualised exchange, on the other hand, has 
all these three functions clearly segregated, i.e. the ownership, management and trading are in 
separate hands.
SECONDARY MARKET
Chapter 4
4.1.2 Stock Trading
What is Screen Based Trading?
What is NEAT?
How to place orders with the broker?
How does an investor get access to internet based trading facility?
What is a Contract Note?
What details are required to be mentioned on the contract note issued by the stock 
broker?
The trading on stock exchanges in India used to take place through open outcry without use of 
information technology for immediate matching or recording of trades. This was time consuming 
and inefficient. This imposed limits on trading volumes and efficiency. In order to provide 
efficiency, liquidity and transparency, NSE introduced a nationwide, on-line, fully-automated 
screen based trading system (SBTS) where a member can punch into the computer the quantities 
of a security and the price at which he would like to transact, and the transaction is executed as 
soon as a matching sale or buy order from a counter party is found.
NSE is the first exchange in the world to use satellite communication technology for trading. Its 
trading system, called National Exchange for Automated Trading (NEAT), is a state of-the-art 
client server based application. At the server end all trading information is stored in an in-
memory database to achieve minimum response time and maximum system availability for 
users. It has uptime record of 99.7%. For all trades entered into NEAT system, there is uniform 
response time of less than one second.
You may go to the broker’s office or place an order on the phone/internet or as defined in the 
Model Agreement, which every client needs to enter into with his or her broker.
There are many brokers of the NSE who provide internet based trading facility to their clients. 
Internet based trading enables an investor to buy/sell securities through internet which can be 
accessed from a computer at the investor’s residence or anywhere else where the client can 
access the internet. Investors need to get in touch with an NSE broker providing this service to 
avail of internet based trading facility.
Contract Note is a confirmation of trades done on a particular day on behalf of the client by a 
trading member. It imposes a legally enforceable relationship between the client and the trading 
member with respect to purchase/sale and settlement of trades. It also helps to settle 
disputes/claims between the investor and the trading member. It is a prerequisite for filing a 
complaint or arbitration proceeding against the trading member in case of a dispute. A valid 
contract note should be in the prescribed form, contain the details of trades, stamped with 
requisite value and duly signed by the authorized signatory. Contract notes are kept in duplicate, 
the trading member and the client should keep one copy each. After verifying the details 
contained therein, the client keeps one copy and returns the second copy to the trading member 
duly acknowledged by him.
A broker has to issue a contract note to clients for all transactions in the form specified by the 
stock exchange. The contract note inter-alia should have following:
Introduction to Financial Markets
21
4.1 Introduction
4.1.1 Stock Exchange
What is meant by Secondary market?
What is the role of the Secondary Market?
What is the difference between the Primary Market and the Secondary Market?
What is the role of a Stock Exchange in buying and selling shares?
What is Demutualisation of stock exchanges?
How is a demutualised exchange different from a mutual exchange?
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.
For the general investor, the secondary market provides an efficient platform for trading of his 
securities. For the management of the company, Secondary equity markets serve as a monitoring 
and control conduit—by facilitating value-enhancing control activities, enabling implementation 
of incentive-based management contracts, and aggregating information (via price discovery) that 
guides management decisions.
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 venue in which already existing/pre-
issued securities are traded among 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.
The stock exchanges in India, under the overall supervision of the regulatory authority, the 
Securities and Exchange Board of India (SEBI), provide a trading platform, where buyers and 
sellers can meet to transact in securities. The trading platform provided by NSE is an electronic 
one and there is no need for buyers and sellers to meet at a physical location to trade. They can 
trade through the computerized trading screens available with the NSE trading members or the 
internet based trading facility provided by the trading members of NSE.
Demutualisation refers to the legal structure of an exchange whereby the ownership, the 
management and the trading rights at the exchange are segregated from one another.
In a mutual exchange, the three functions of ownership, management and trading are 
concentrated into a single Group. Here, the broker members of the exchange are both the owners 
and the traders on the exchange and they further manage the exchange as well. This at times can 
lead to conflicts of interest in decision making. A demutualised exchange, on the other hand, has 
all these three functions clearly segregated, i.e. the ownership, management and trading are in 
separate hands.
SECONDARY MARKET
Chapter 4
4.1.2 Stock Trading
What is Screen Based Trading?
What is NEAT?
How to place orders with the broker?
How does an investor get access to internet based trading facility?
What is a Contract Note?
What details are required to be mentioned on the contract note issued by the stock 
broker?
The trading on stock exchanges in India used to take place through open outcry without use of 
information technology for immediate matching or recording of trades. This was time consuming 
and inefficient. This imposed limits on trading volumes and efficiency. In order to provide 
efficiency, liquidity and transparency, NSE introduced a nationwide, on-line, fully-automated 
screen based trading system (SBTS) where a member can punch into the computer the quantities 
of a security and the price at which he would like to transact, and the transaction is executed as 
soon as a matching sale or buy order from a counter party is found.
NSE is the first exchange in the world to use satellite communication technology for trading. Its 
trading system, called National Exchange for Automated Trading (NEAT), is a state of-the-art 
client server based application. At the server end all trading information is stored in an in-
memory database to achieve minimum response time and maximum system availability for 
users. It has uptime record of 99.7%. For all trades entered into NEAT system, there is uniform 
response time of less than one second.
You may go to the broker’s office or place an order on the phone/internet or as defined in the 
Model Agreement, which every client needs to enter into with his or her broker.
There are many brokers of the NSE who provide internet based trading facility to their clients. 
Internet based trading enables an investor to buy/sell securities through internet which can be 
accessed from a computer at the investor’s residence or anywhere else where the client can 
access the internet. Investors need to get in touch with an NSE broker providing this service to 
avail of internet based trading facility.
Contract Note is a confirmation of trades done on a particular day on behalf of the client by a 
trading member. It imposes a legally enforceable relationship between the client and the trading 
member with respect to purchase/sale and settlement of trades. It also helps to settle 
disputes/claims between the investor and the trading member. It is a prerequisite for filing a 
complaint or arbitration proceeding against the trading member in case of a dispute. A valid 
contract note should be in the prescribed form, contain the details of trades, stamped with 
requisite value and duly signed by the authorized signatory. Contract notes are kept in duplicate, 
the trading member and the client should keep one copy each. After verifying the details 
contained therein, the client keeps one copy and returns the second copy to the trading member 
duly acknowledged by him.
A broker has to issue a contract note to clients for all transactions in the form specified by the 
stock exchange. The contract note inter-alia should have following:
20
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
Name, address and SEBI Registration number of the Member broker.
Name of Partner/Proprietor/Authorised Signatory.
Dealing Office Address/Tel. No./Fax no., Code number of the member given by the Exchange.
Contract number, date of issue of contract note, settlement number and time period for 
settlement.
Constituent (Client) name/Code Number.
Order number and order time corresponding to the trades.
Trade number and Trade time.
Quantity and kind of security bought/sold by the client.
Brokerage and Purchase/Sale rate.
Service tax rates, Securities Transaction Tax and any other charges levied by the broker.
Appropriate stamps have to be affixed on the contract note or it is mentioned that the 
consolidated stamp duty is paid.
Signature of the Stock Broker/Authorized Signatory.
The maximum brokerage that can be charged by a broker from his clients as commission cannot 
be more than 2.5% of the value mentioned in the respective purchase or sale note.
An investor does not get any protection if he trades outside a stock exchange. Trading at the 
exchange offers investors the best prices prevailing at the time in the market, lack of any counter-
party risk which is assumed by the clearing corporation, access to investor grievance and 
redressal mechanism of stock exchanges, protection upto a prescribed limit, from the Investor 
Protection Fund etc.
One can confirm it by verifying the registration certificate issued by SEBI. A broker’s registration 
number begins with the letters ‘INB’ and that of a sub broker with the letters ‘INS’.
Here are some useful pointers to bear in mind before you invest in the markets:
Make sure your broker is registered with SEBI and the exchanges and do not deal with 
unregistered intermediaries.
Ensure that you receive contract notes for all your transactions from your broker within one 
working day of execution of the trades.
All investments carry risk of some kind. Investors should always know the risk that they are 
taking and invest in a manner that matches their risk tolerance.
Do not be misled by market rumours, during advertisement or ‘hot tips’ of the day.
Take informed decisions by studying the fundamentals of the company. Find out the 
business the company is into, its future prospects, quality of management, past track record 
What is the maximum brokerage that a broker can charge?
Why should one trade on a recognized stock exchange only for buying/selling shares?
How to know if the broker or sub broker is registered?
What precautions must one take before investing in the stock markets?
etc Sources of knowing about a company are through annual reports, economic magazines, 
databases available with vendors or your financial advisor.
If your financial advisor or broker advises you to invest in a company you have never heard 
of, be cautious. Spend some time checking out about the company before investing.
Do not be attracted by announcements of fantastic results/news reports, about a company. 
Do your own research before investing in any stock.
Do not be attracted to stocks based on what an internet website promotes, unless you have 
done adequate study of the company.
Investing in very low priced stocks or what are known as penny stocks does not guarantee 
high returns.
Be cautious about stocks which show a sudden spurt in price or trading activity.
Any advise or tip that claims that there are huge returns expected, especially for acting 
quickly, may be risky and may to lead to losing some, most, or all of your money.
Ensure that the intermediary (broker/sub-broker) has a valid SEBI registration certificate.
Enter into an agreement with your broker/sub-broker setting out terms and conditions 
clearly.
Ensure that you give all your details in the ‘Know Your Client’ form.
Ensure that you read carefully and understand the contents of the ‘Risk Disclosure 
Document’ and then acknowledge it.
Insist on a contract note issued by your broker only, for trades done each day.
Ensure that you receive the contract note from your broker within 24 hours of the 
transaction.
Ensure that the contract note contains details such as the broker’s name, trade time and 
number, transaction price, brokerage, service tax, securities transaction tax etc. and is 
signed by the Authorised Signatory of the broker.
To cross check genuineness of the transactions, log in to the NSE website 
(www.nseindia.com) and go to the ‘trade verification’ facility extended by NSE. Issue 
account payee cheques/demand drafts in the name of your broker only, as it appears on the 
contract note/SEBI registration certificate of the broker.
While delivering shares to your broker to meet your obligations, ensure that the delivery 
instructions are made only to the designated account of your broker only.
Insist on periodical statement of accounts of funds and securities from your broker. Cross 
check and reconcile your accounts promptly and in case of any discrepancies bring it to the 
attention of your broker immediately.
Please ensure that you receive payments/deliveries from your broker, for the transactions entered 
by you, within one working day of the payout date.
Ensure that you do not undertake deals on behalf of others or trade on your own name and 
then issue cheques from a family members’/ friends’ bank accounts.
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
What Do’s and Don’ts should an investor bear in mind when investing in the stock 
markets?
Introduction to Financial Markets
23
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
Name, address and SEBI Registration number of the Member broker.
Name of Partner/Proprietor/Authorised Signatory.
Dealing Office Address/Tel. No./Fax no., Code number of the member given by the Exchange.
Contract number, date of issue of contract note, settlement number and time period for 
settlement.
Constituent (Client) name/Code Number.
Order number and order time corresponding to the trades.
Trade number and Trade time.
Quantity and kind of security bought/sold by the client.
Brokerage and Purchase/Sale rate.
Service tax rates, Securities Transaction Tax and any other charges levied by the broker.
Appropriate stamps have to be affixed on the contract note or it is mentioned that the 
consolidated stamp duty is paid.
Signature of the Stock Broker/Authorized Signatory.
The maximum brokerage that can be charged by a broker from his clients as commission cannot 
be more than 2.5% of the value mentioned in the respective purchase or sale note.
An investor does not get any protection if he trades outside a stock exchange. Trading at the 
exchange offers investors the best prices prevailing at the time in the market, lack of any counter-
party risk which is assumed by the clearing corporation, access to investor grievance and 
redressal mechanism of stock exchanges, protection upto a prescribed limit, from the Investor 
Protection Fund etc.
One can confirm it by verifying the registration certificate issued by SEBI. A broker’s registration 
number begins with the letters ‘INB’ and that of a sub broker with the letters ‘INS’.
Here are some useful pointers to bear in mind before you invest in the markets:
Make sure your broker is registered with SEBI and the exchanges and do not deal with 
unregistered intermediaries.
Ensure that you receive contract notes for all your transactions from your broker within one 
working day of execution of the trades.
All investments carry risk of some kind. Investors should always know the risk that they are 
taking and invest in a manner that matches their risk tolerance.
Do not be misled by market rumours, during advertisement or ‘hot tips’ of the day.
Take informed decisions by studying the fundamentals of the company. Find out the 
business the company is into, its future prospects, quality of management, past track record 
What is the maximum brokerage that a broker can charge?
Why should one trade on a recognized stock exchange only for buying/selling shares?
How to know if the broker or sub broker is registered?
What precautions must one take before investing in the stock markets?
etc Sources of knowing about a company are through annual reports, economic magazines, 
databases available with vendors or your financial advisor.
If your financial advisor or broker advises you to invest in a company you have never heard 
of, be cautious. Spend some time checking out about the company before investing.
Do not be attracted by announcements of fantastic results/news reports, about a company. 
Do your own research before investing in any stock.
Do not be attracted to stocks based on what an internet website promotes, unless you have 
done adequate study of the company.
Investing in very low priced stocks or what are known as penny stocks does not guarantee 
high returns.
Be cautious about stocks which show a sudden spurt in price or trading activity.
Any advise or tip that claims that there are huge returns expected, especially for acting 
quickly, may be risky and may to lead to losing some, most, or all of your money.
Ensure that the intermediary (broker/sub-broker) has a valid SEBI registration certificate.
Enter into an agreement with your broker/sub-broker setting out terms and conditions 
clearly.
Ensure that you give all your details in the ‘Know Your Client’ form.
Ensure that you read carefully and understand the contents of the ‘Risk Disclosure 
Document’ and then acknowledge it.
Insist on a contract note issued by your broker only, for trades done each day.
Ensure that you receive the contract note from your broker within 24 hours of the 
transaction.
Ensure that the contract note contains details such as the broker’s name, trade time and 
number, transaction price, brokerage, service tax, securities transaction tax etc. and is 
signed by the Authorised Signatory of the broker.
To cross check genuineness of the transactions, log in to the NSE website 
(www.nseindia.com) and go to the ‘trade verification’ facility extended by NSE. Issue 
account payee cheques/demand drafts in the name of your broker only, as it appears on the 
contract note/SEBI registration certificate of the broker.
While delivering shares to your broker to meet your obligations, ensure that the delivery 
instructions are made only to the designated account of your broker only.
Insist on periodical statement of accounts of funds and securities from your broker. Cross 
check and reconcile your accounts promptly and in case of any discrepancies bring it to the 
attention of your broker immediately.
Please ensure that you receive payments/deliveries from your broker, for the transactions entered 
by you, within one working day of the payout date.
Ensure that you do not undertake deals on behalf of others or trade on your own name and 
then issue cheques from a family members’/ friends’ bank accounts.
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
¦
What Do’s and Don’ts should an investor bear in mind when investing in the stock 
markets?
22
¦
¦
¦
¦
¦
¦
¦
¦
l
l
l
l
l
¦
¦
¦
¦
¦
¦
¦
Similarly, the Demat delivery instruction slip should be from your own Demat account, not 
from any other family members’/friends’ accounts.
Do not sign blank delivery instruction slip(s) while meeting security payin obligation.
No intermediary in the market can accept deposit assuring fixed returns. Hence do not give 
your money as deposit against assurances of returns.
“Portfolio Management Services’ could be offered only by intermediaries having specific 
approval of SEBI for PMS. Hence, do not part your funds to unauthorized persons for 
Portfolio Management.
Delivery Instruction Slip is a very valuable document. Do not leave signed blank delivery 
instruction slip with anyone. While meeting pay in obligation make sure that correct ID of 
authorised intermediary is filled in the Delivery Instruction Form.
Be cautious while taking funding form authorised intermediaries as these transactions are 
not covered under Settlement Guarantee mechanisms of the exchange.
Insist on execution of all orders under unique client code allotted to you. Do not accept 
trades executed under some other client code to your account.
When you are authorising someone through ‘Power of Attorney’ for operation of your DP 
account, make sure that:
your authorization is in favour of registered intermediary only.
authorization is only for limited purpose of debits and credits arising out of valid 
transactions executed through that intermediary only.
you verify DP statement periodically say every month/fortnight to ensure that no 
unauthorised transactions have taken place in your account.
authorization given by you has been properly used for the purpose for which 
authorization has been given.
in case you find wrong entries please report in writing to the authorized intermediary.
Don’t accept unsigned/duplicate contract note.
Don’t accept contract note signed by any unauthorised person.
Don’t delay payment/deliveries of securities to broker.
In the event of any discrepancies/disputes, please bring them to the notice of the broker 
immediately in writing (acknowledged by the broker) and ensure their prompt rectification.
In case of sub-broker disputes, inform the main broker in writing about the dispute at the 
earliest. If your broker/sub-broker does not resolve your complaints within a reasonable 
period please bring it to the attention of the ‘Investor Services Cell’ of the NSE.
While lodging a complaint with the ‘Investor Grievances Cell’ of the NSE, it is very 
important that you submit copies of all relevant documents like contract notes, proof of 
payments/delivery of shares etc. alongwith the complaint. Remember, in the absence of 
sufficient documents, resolution of complaints becomes difficult.
Familiarise yourself with the rules, regulations and circulars issued by stock exchanges/SEBI 
before carrying out any transaction.
4.2 Products in the Secondary Markets
4.2.1 Equity Investment
What are the products dealt in the Secondary Markets?
Why should one invest in equities in particular?
Following are the main financial products/instruments dealt in the Secondary market which may 
be divided broadly into Shares and Bonds:
Shares:
Equity Shares: An equity share, commonly referred to as ordinary share, represents the form of 
fractional ownership in a business venture.
Rights Issue/ Rights Shares: The issue of new securities to existing shareholders at a ratio to those 
already held, at a price. For e.g. a 2:3 rights issue at Rs. 125, would entitle a shareholder to 
receive 2 shares for every 3 shares held at a price of Rs. 125 per share.
Bonus Shares: Shares issued by the companies to their shareholders free of cost based on the 
number of shares the shareholder owns.
Preference shares: Owners of these kind of shares are entitled to a fixed dividend or dividend 
calculated at a fixed rate to be paid regularly before dividend can be paid in respect of equity 
share. They also enjoy priority over the equity shareholders in payment of surplus. But in the 
event of liquidation, their claims rank below the claims of the company’s creditors, 
bondholders/debenture holders.
Cumulative Preference Shares: A type of preference shares on which dividend accumulates if 
remained unpaid. All arrears of preference dividend have to be paid out before paying dividend 
on equity shares.
Cumulative Convertible Preference Shares: A type of preference shares where the dividend 
payable on the same accumulates, if not paid. After a specified date, these shares will be 
converted into equity capital of the company.
Bond: is a negotiable certificate evidencing indebtedness. It is normally unsecured. A debt 
security is generally issued by a company, municipality or government agency. A bond investor 
lends money to the issuer and in exchange, the issuer promises to repay the loan amount on a 
specified maturity date. The issuer usually pays the bond holder periodic interest payments over 
the life of the loan. The various types of Bonds are as follows:
Zero Coupon Bond: Bond issued at a discount and repaid at a face value. No periodic interest is 
paid. The difference between the issue price and redemption price represents the return to the 
holder. The buyer of these bonds receives only one payment, at the maturity of the bond.
Convertible Bond: A bond giving the investor the option to convert the bond into equity at a fixed 
conversion price.
Treasury Bills: Short-term (up to one year) bearer discount security issued by government as a 
means of financing their cash requirements.
When you buy a share of a company you become a shareholder in that company. Shares are also 
known as Equities. Equities have the potential to increase in value over time. Research studies 
have proved that the equity returns have outperformed the returns of most other forms of 
Introduction to Financial Markets
25