CBSE Class 11 Financial Markets Secondary Market

Secondary Markets

The market for long-term securities like bonds, equity stocks and preferred stocks is divided into primary market and secondary market. The primary market deals with the new issues of securities. Outstanding securities are traded in the secondary market, which is commonly known as stock market that predominantly deals in the equity shares. Debt instruments like bonds and debentures are also traded in the stock market. Wellregulated and active stock market promotes capital formation. Growth of the primary  market depends on the secondary market. The health of the economy is reflected by the growth of the stock market.

3.1.1 Relationship between the Primary and Secondary Markets The new issue market cannot function without the secondary market. The secondary market or the stock market provides liquidity for the issued securities the issued securities are traded in the secondary market offering liquidity to the stocks at a fair price.

The stock exchanges through their listing requirements, exercise control over the primary market. The company seeking for listing on the respective stock exchange has to comply with all the rules and regulations given by the stock exchange. The primary market provides a direct link between the prospective investors and the company. By providing liquidity and safety, the stock markets encourage the public to subscribe to the new issues. The market ability and the capital appreciation provided in the stock market are the major factors that attract the investing public towards the stock market. Thus, it provides an indirect link between the savers and the company.

Even though they are complementary to each other, their functions and the organizational set up are different from each other. The health of the primary market depends on the secondary market and vice-versa.

3.1.2 History

The origin of the secondary market i.e., stock exchanges in India can be traced back to the later half of 19th century. After the American Civil War (1860-61) due to the share mania of the public, the number of brokers dealing in shares increased. The brokers organized an informal association in Mumbai named "The Natic Stock and Share Brokers Association" in 1875.

Increased activity in trade and commerce during the First World War and Second War resulted in an increase in the stock trading. Stock exchanges were established in different centers like Chennai, Delhi, Nagpur, Kanpur, Hyderabad and Banaglore. The growth of stock exchanges suffered a set back after the end of World War. Worldwide depression affected them. Most of the stock exchanges in the early stages had a speculative nature of working without technical strength. Securities and Contract Regulation Act 1956 gave powers to the central government to regulate the stock exchanges. The SCR Act recognized the stock exchanges in Mumbai, Kolkata, Chennai, Ahmedabad, Delhi, Hyderabad and Indore. The Bangalore stock exchange was recognized only in 1963. At present we have 23 stock exchanges and 21 of them had hardware and software compliant to solve Y2K problem.

Till recent past, floor trading took place in all the stock exchanges. In the floor trading system, the trade takes place through open outcry system during the official trading hours. Trading posts are assigned for different securities where buy and sell activities of securities took place. This system needs a face-to-face contact among the traders and restricts the trading volume. The speed of the new information reflected on the prices was rather slow. The deals were also not transparent and the system favored the brokers rather than the investors.

The setting up of NSE and OTCEI with the screen based trading facility resulted in more and more stock exchanges turning towards the computer based trading. Bombay stock exchange introduced the screen based trading system in 1995, which is known as BOLT (Bombay On-line Trading System). Madras stock exchange introduced Automated Network Trading System (MANTRA) on Oct 7th 1996. Apart from Bombay stock exchange, Vadodara, Delhi, Pune, Bangalore, Calcutta and Ahemedabad stock exchanges have introduced screen based trading. Other exchanges are also planning to shift to the screen based trading.

3.1.3 Functions

Maintains Active Trading: Shares are traded on the stock exchanges, enabling the investors to buy and sell securities. The prices may vary from transaction to transaction. A continuous trading increases the liquidity or marketability of the shares traded on the stock exchanges. Fixation of Prices: Price is determined by the transactions that flow from investors' demand and supplier's preferences. Usually the traded prices are made known to the public. This helps the investors to make better decisions.

Ensures Safe and Fair Dealing: The rules, regulations and by-laws of the stock exchanges' provide a measure of safety to the investors. Transactions are conducted under competitive conditions enabling the investors to get a fair deal.

Aids in Financing the Industry: A continuous market for shares provides a favorable climate for raising capital. The negotiability and transferability of the securities helps the companies to raise long-term funds. When it is easy to trade the securities, investors are willing to subscribe to the initial public offerings. This stimulates the capital formation. Dissemination of Information: Stock exchanges provide information through their various publications. They publish the share prices traded on daily basis along with the volume traded. Directory of Corporate information is useful for the investors' assessment regarding the corporate. Handouts, handbooks and pamphlets provide information regarding the functioning of the stock exchanges.

Please refer to the link below - CBSE Class 11 Financial Markets-Secondary Market