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The secondary market comprises of broad segments such as Equity, Debt and Derivatives. Equity shares are the most widely traded form of securities. There are various ways in which equity shares are issued such as IPOs, rights issues and bonuses.
Who Are The Parties To The Transactions?
In the secondary market, there are basically three parties to a transaction. These are buyers, sellers and intermediaries between them.
The first two categories consist of retail investors, high net worth individuals (HNIs), Mutual Fund Houses, Corporates and Institutional Investors, Foreign Institutional Investors etc.
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Retail investors are individual investors with limited access to funds. They park their surplus funds in equities to earn returns. Equity investments as an investment option for retail investors are considered to be high risk - high return proposals compared to other investment instruments like fixed deposits and post office schemes.
The term ‘high net worth individual’ or HNI is used to refer to individuals and families that are affluent in their wealth holding and consequently have a higher risk profile. It’s a relative term and its comprehension differs in different financial markets and regions.
Mutual funds pool up money of several investors and invest in various asset classes including equities. These returns are distributed among the investors in proportion of the Mutual Fund units held by them. This investment mode has gained a lot of popularity across the world. It is most suitable for investors who lack the skill and acumen to pick up good stocks.
Foreign Institutional Investors (FIIs) are venture capital funds, pension funds, hedge funds, mutual funds and other institutions registered outside the country of the financial market in which they take an investment exposure.
Mutual Funds and FIIs have gained a lot of importance as market participants as they have huge sums of money in their kitty to manage and are often instrumental in giving direction to the stock markets in the short term. Heavy buying or selling on their part plays a substantial part in market rise and fall.
Intermediaries such as stockbrokers, depositories, depository participants and banks facilitate payment of money in share transactions.
Brokerages are entities registered as members with the concerned stock exchange. In turn you, the investor, would be required to enroll with the broker. Brokers charge commission based fees for the services they offer. Sub brokers appointed by main brokers also offer the same services for a fee.
Depositories hold shares for investors in electronic form. Previously shares were held in physical form meaning that there were paper share certificates for shares held. This new system of holding shares through depositories reduces paper work and time and also does away with risks associated with physical certificates such as bad delivery, fake securities etc. There are two depositories in India, the National Securities Depositories Limited (NSDL) and the Central Depositories Services Limited (CDSL). These two depositories provide service to investors through their agents termed as Depository Participants (DPs). As per SEBI regulations, Banks, Financial Institutions and SEBI registered trading members can become DPs.
How Does The Secondary Market Function?
In order to understand how the secondary markets function we must first be apprised of certain important terms:
Price: - The price of a stock is totally guided by the forces of demand and supply. The share prices of liquid stocks with wide participation keep changing throughout the trading hours They can be tracked continuously on trading screens.
Circuit Filters: - Share prices can swing in a volatile manner on back of news or even due to rigging by operators. It is important to protect the interest of investors and guard them against major losses due to such volatile price movements. So stocks are subjected to an upper and a lower circuit. The price of the stock can move within this range only on a particular trading day There are various slabs like 2%, 5%, 10% and 20% circuit that different stocks are subjected to. The slabs are fixed depending on various factors like share price, retail share holding etc.
Volume: - The term volume refers to the total number of shares traded during the day Volumes can be calculated for a particular stock, an index or even for the entire exchange.
For more information in bonds click here
For more information in derivatives click here
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