PRIMARY AND SECONDARY MARKETS
- Every security market has two complementary markets—primary and the secondary.
- The market in which the instruments of security market are traded (procured) directly between the capital raiser and the instrument purchaser is known as the primary market. As for example, a share being directly purchased by anybody from the issuer which may be the company itself.
- The market where the instruments of security market are traded among the primary instrument holders is known as the secondary market. Such transactions need an institutionalised floor for their trading which is made available by the stock exchanges.
- A physically existing institutionalised set-up where instruments of security stock market (shares, bonds, debentures, securities, etc.) are traded.
- Makes a floor available to the buyers and sellers of stocks and liquidity comes to the stocks. It is the single most important institution in the secondary market for securities.
- Makes available the prices of trading as an important piece of information to the investors.
- By publishing its 'Index', it fulfils the purpose of projecting the moods of the stock market.
- Passes updated informations to the enlisted companies about their present stockholders.
- Top five largest stock exchanges (on the basis of market capitalisation) of the world in their decreasing order are—the New York Stock Exchange, the NASDAQ, the Tokyo Stock Exchange, the London Stock Exchange and the Bombay Stock Exchange.
The National Stock Exchange of India Ltd. (NSE) was set up in 1992 and became operationalised in 1994. The sponsors of the exchange are financial institutions, including IDBI, LIC and GIC with IDBI as its promotor.
Though the Over the Counter Exchange of India Ltd (OTCEI) was set up in 1989, it could commence trading only in 1992. India's first fully computerised stock exchange was promoted by the UTI, ICICI, SBI Cap among others, in order to overcome problems such as lack of transparency and delays in settlements prevalent in the older stock exchanges.
The Interconnected Stock Exchange of India (ISE) is basically a single floor of India's 15 regional stock exchanges (RSEs), set up in 1998. The RSEs were provided increased reach through this. It is a web- based exchange.
The Bombay Stock Exchange Ltd. (BSE), earlier a regional stock exchange, converted into a national one in 2002. The biggest in India, it accounts for almost 75 per cent of total stocks traded in India and is the fifth largest in the world (on the basis of market capitalisation).
A new stock exchange to promote liquidity to the stocks of the small enterprises (SMEs) was launched in 2005 jointly and medium the BSE and the FISE (Federation of Indian Stock Exchanges, representing 18 regional stock exchanges). It is better known as the BSE Indo Next.
SME Exchanges : BSESME and Emerge
- SME exchange is a stock exchange dedicated for trading the shares of small and medium scale enterprises (SMEs) who, otherwise, find it difficult to get listed in the main exchanges. The concept originated from the difficulties faced by SMEs in gaining visibility or attracting sufficient trading volumes when listed along with other stocks in the main exchanges.
- World over, trading platforms/exchanges for the shares of SMEs are known by different names such as Alternate Investment Markets or Growth Enterprises Market, SME Board etc. Some of the known markets for SMEs are AIM (Alternate Investment Market) in UK, TSX Ventures in Canada, GEM (Growth Enterprise's Market) in Hong Kong, MOTHERS (Market of the High-Growth and Emerging Stocks) in Japan, Catalist in Singapore and Chinext, the latest initiative in China.
- In India, similarly, after the two previous attempts—OTCEI (Over the Counter Exchange of India, 1989) and Indonext—the market regulator, SEBI, on May 18, 2010 permitted setting up of a dedicated stock exchange or a trading platform for SMEs.
- The existing bourses/stock exchanges in India, BSE and NSE went live on March 13, 2012 with a separate trading platform for small and medium enterprises (SMEs). BSE has named its SME platform as BSESME, while NSE has named it as Emerge.
Players in the Stock Exchanges
- Broker : Broker is a registered member of a stock exchange who buys or sells shares/securities on his client's behalf and charges a commission on the gross value of the deal—such brokers are also known as commission brokers.
- Jobber : A jobber is a broker's broker or one who specialises in specific securities catering to the need of other brokers—in India also known as 'Taravaniwallah'. A jobber is located at a particular trading post on the floor of the stock exchange and does buying and selling for small price differences, called the spread. He has no contact with the investing public.
- Market : Maker Functions as an intermediary in the market ready to buy and sell securities. He simultaneously quotes two-way rates—like a jobber basically with the only difference that he quotes two-way rates, for buying and selling at the same time.
- The regulator of Indian stock market, set up under the Security and Exchange Board of India Act, 1992 with its head office in Mumbai.
- Its initial paid-up capital was ₹50 crore provided by the promoters—the IDBI, the IFCI and the ICICI. The Board of SEBI comprises nine members excluding the chairman—one member each from the Ministries of Finance and Law, one member from the RBI and two other members appointed by the central government.
- Commodity trading happens similar to 'stocks' (shares, securities, debentures, bonds) trading in the stock market. However, commodities are actual physical goods such as corn, silver, gold, crude oil, etc. Futures are contracts for commodities that are traded at a futures exchange like the Chicago Board of Trade (CBOT). Futures contracts have expanded beyond just commodities, now there are futures contracts on financial markets like foreign currencies, interest rates, etc.
- Commodity futures serve a great purpose in any economy. As we see in the case of agricultural commodity— their prices play a key role in determining the fortune of the agriculture and food processing industry in India.
- There are 21 national and regional commodity exchanges in the country.
- Spot Exchanges refer to electronic trading platforms which facilitate purchase and sale of specified commodities, including agricultural commodities, metals and bullion by providing spot delivery contracts in these commodities.
- This market segment functions like the equity segment in the main stock exchanges. Alternatively, this can be considered as a guaranteed direct marketing by sellers of the commodities. Spot Exchanges leverage on the latest technology available in the stock exchange framework for the trading of goods.
- Spot exchange has been defined by the Warehousing Development and Regulatory Authority (Electronic Warehouse Receipts) Regulations, 2011 as "a body corporate incorporated under the Companies Act, 1956 and engaged in assisting, regulating or controlling the business of trading in electronic warehouse receipts."
Spot Exchanges in India
- The National Spot Exchange Ltd. (NSEL), set up in 2008, is a national level commodity spot exchange promoted by the Financial Technologies India Ltd (FTIL) and National Agricultural Cooperative Marketing Federation of India Limited (NAFED). After the FTIL was found involved in irregularities, the FMC (Forward Market Commission), by end-March 2014 asked it to exit the spot exchange.
- NCDEX Spot Exchange Ltd (established in October 2006 by NSE).
- Reliance Spot Exchange Ltd. (R-Next).
- Indian Bullion Spot Exchange Ltd.
Advantages of Spot Exchanges
- Spot exchange provides various advantages over the traditional way of trading in commodities: Efficient price determination as price is determined by a wider cross-section of people from across the country, unlike the traditional 'mandis' where price discovery for commodities used to happen only through local participation.
- Ensures transparency in price discovery— anonymity ensures convergence of different price perceptions, as the buyer or seller merely expresses their desire to trade without even meeting directly.
- Ensures participation in large numbers by farmers, traders and processors across the country and eliminate the possibility of cartelisation and other such unhealthy practices prevalent in the commodity markets.
- It brings in some best practices in commodity trading like, system of grading for quality, creating network of warehouses with assaying facilities, facilitating trading in relatively smaller quantities, lower transaction cost, etc.
Raising Capital in the Primary Market
- Public Issue : A public offer is open for all Indian citizens, the most broad-based method of raising capital and the most prestigious, too (the Reliance Industries Ltd. is the biggest company of India in this category).
- Rights Issue : Raising capital from the existing shareholders of a company, it means it is a preferential kind of issue restricted to a certain category of the public only.
- Private Placement : Raising capital by selling shares to a select group of investors, usually financial institutions (FIs) but may be to individuals also. This is done through a process of direct negotiations (completely opposite to the public issue). The advantage of this route is the substantial saving a share issuing company makes on marketing expenses (but the risk of shifting loyalties of the investors in this route is also the highest).
IMPORTANT TERMS OF STOCK MARKET
- Short Selling : Sale of a share which is not owned. This is done by someone after borrowing shares from stockbrokers promising to replace them at a future date on the hope (speculation) that the price will fall by then. He fetches profit if price of the share really fell down by the future date of replacement and sustains a loss if the price increased. Recently, short selling has been allowed in India by SEBI.
- Bear and Bull : A person who speculates share prices to fall in future and so sells his shares and earns profit is a bear. He earns profit out of a falling market. Basically, here he is short selling the shares. Opposite to bear, bull is a person who speculates share prices to go up in future so either stops selling the select group of shares for that time to be reached (he is basically taking long position on those shares) or starts purchasing that select group of shares.
- Book Building : A provision allowed by SEBI to all Initial Public offers (IPOs) in which individual investors are reserved and allotted shares by the company. But the issuer has to disclose the price (at which shares have been allotted the size of the issue and the number of shares offered to the public).
- IPO : Initial Public Offer (IPO) is an event of share issuing when a company comes up with its share/securities issued for the first time.
- Price Band : A process of public issue where the company gives a price range (known as price band) and it is left upon the share applicants to quote their prices on it—the highest bidders getting the shares. This is a variant of share issue at premium but considered a safer choice.
- Scrip Share : A share given to the existing shareholders without any charge—also known as bonus share.
- Sweat Share : A share given to the employees of the company without any charge.
- Rolling Settlement : An important reform measure started in the Indian stock market in mid-2001 under which all commitments of sale and purchase result into payment/delivery at the end of the 'X' days later (where 'X' stands for 5 days. Some shares have X as one, two or three days, too). Today, all shares are covered under this provision.
- Badla : When the buyers want postponement of the transaction—in Western world called Contango.
- Undha Badla : When the sellers want postponement of the transaction—also known as the reverse badla or backwardation.
- Futures : A trading allowed in shares where a future price is quoted for the shares and the payment and delivery takes place on the pre-determined dates.
- Depositories : Started in 1996 under which stocks are converted into 'paperless form' (dematerialisation of shares shortly known as the 'demat'). At present, two public sector depositaries (Mumbai) are functioning in India set up under the Depositories Act, 1996—
(i) NSDL (National Securities Depositories Ltd.)
(ii) CDSL (Central Depositories Services Ltd.)
- Spread : The difference between the buying and selling prices of a share is called spread. Higher the liquidity of a share lower its spread and vice versa. Also known as Jobber's Turn or Margin or Hair cut.
- Kerb : Dealings The transactions of stocks which take place outside the stock exchanges— unofficially and take place after the normal trading hours.
- NSCC : The National Securities Clearing Corporation (NSCC), a public sector company set up in 1996 takes the counter party risk of all transactions done at the NSE just as an intermediary guarantees all trades.
- Demutualisation : A process started (2002) by SEBI under which ownership, management and trading membership was to be segregated from each other. No broker was to be on the Board of Directors or an office-bearer in a stock exchange.
- Authorised Capital : The limits upto which shares can be issued by a company—also known as the nominal or registered capital. This is fixed in the Memorandum of Association (MoA) and the article of association (AoA) of a company as required by the Companies Act (Law).
- Paid-up Capital : The part of the authorised capital of a company that has actually been paid by shareholders. A difference may arise because all shares authorised might not be issued or issued shares are only partly paid-up.
- Subscribed Capital : The amount actually paid by the shareholders or have been committed by them for contribution.
- Issued Capital : The amount which is sought by a company to be raised by issuing shares which cannot exceed the authorised capital of the company.
- Greenshoe Option : A provision under which a company issuing shares for the first time is allowed to sell some additional shares to the public—usually 15 per cent, is also known as over-allotment provision. It gets its name from the first company which was allowed such an option.
- Penny Stocks : The share which remains low-priced at a stock exchange for a comparatively longer period. Speculators may start hoarding them for hefty margins, this was seen in India in mid-2006. And since such stocks get hoarded, ultimately their market prices increase.
- ESOP : The Employee Stock Ownership plan (ESOP) enables a foreign company to offer its shares to employees overseas. It was allowed in India (February 2005) provided that the MNC has minimum 51 per cent holding in its Indian company. Earlier a permission from the RBI was required for such an option.
- SBT : Screen Based Trading (SBT) is trading of stock based on the electronic medium, i.e., with the help of computer monitor, internet, etc. First such trading was introduced in New York in 1972 by the bond broker Cantor Fitzgerald. India introduced it in 1989 at the OTCEI. Now it is carried out at all exchanges.
- OFCDs : Debentures are the debt instruments which may be issued by a listed or non-listed firm to raise funds in a security market. They are of many types, viz., Redeemable, Non-redeemable, Partially Convertible and Fully Convertible. In case of 'fully convertible debentures' an 'option' (that is why the name OFCDs, i.e., Optionally Fully Convertible Debentures) is given to the debenture holders who may wish to convert their OFCDs into shares.
- Derivatives : Derivative is a product whose value is derived from the value of one or more basic variables, called bases ,in a contractual manner. The underlying asset can be equity, forex, commodity or any other asset. For example, wheat farmers may wish to sell their harvest at a future date to eliminate the risk of a change in prices by that date. Such a transaction is an example of a derivative.
- Indian Depository Receipts (IDRs) As per the definition given in the Companies (Issue of Indian Depository Receipts) Rules, 2004, IDR is an instrument in the form of a depository receipt created by the Indian depository in India against the underlying equity shares of the issuing company. In an IDR, foreign companies would issue shares, to an Indian depository [say the National Security Depository Limited (NSDL)], which would in turn issue depository receipts to investors in India. The actual shares underlying IDRs would be held by an Overseas Custodian, which shall authorise the Indian depository to issue of IDRs.
- Shares ‘at Par' and 'at Premium' : An ordinary share in India, in general, is said to have a par value (face value) of ₹10, though some shares issued earlier still carry a par value of ₹100. Par value implies the value at which a share is originally recorded in the balance sheet as 'equity capital' (this is the same as 'ordinary share capital'). SEBI guidelines for public issues by new companies established by individual promoters and entrepreneurs, require all new companies to offer their shares to the public at par, i.e., at ₹10. How ever, a new company set up by existing companies (and of course existing companies themselves) with a track record of at least five years of consistent profitability are allowed to issue shares at a premium.
FOREIGN FINANCIAL INVESTMENT
- India opened its capital market for foreign portfolio investment / foreign institutional investment (FPI/ FII) in 1994— at present, there are 9,136 such firms registered with the SEBI. Today, they are one of the biggest drivers of India's financial markets and have invested around ₹12.51 trillion (US$ 171.81 billion ) in India between FY 02-18.
- Highly developed primary and secondary markets have attracted FIIs/FPIs to the country. Their investments are regulated by SEBI while the ceilings on such investments are maintained by the RBI. Almost all types of them are today active in the market— Hedge Funds, Foreign Mutual Fund, Sovereign Wealth Funds, Pension Funds, Trusts, Asset management Companies, Endowments, University Funds, etc.
- The FPIs have been classified by the SEBI into three broad categories, namely —
- Category I : The government entities / institutions investing in Indian security market on behalf of the Central Bank.
- Category II : The financial institutions, mutual funds, etc., which duly regulated in the countries of their origin.
- Category III : The financial institutions which do not fall either of the above-given categories.