Page 105 - DCOM304_INDIAN_FINANCIAL_SYSTEM

Indian Financial System

Notes industries and checks the flow of capital in uneconomic and less profitable ventures. This, the
secondary market seeks to achieve through keeping an eye on the exchanges. A permanent
surge in share price of a particular industry suggests that more capital can be absorbed by the
industry with the advantage. On the contrary, if share price in an industry registers continued
fall, it suggests that the industry cannot absorb the capital profitably. Through price mechanism,
the secondary market prevents gluts and scarcities of capital as between different industries and
avoids misalignments between supply of capital and the demands of industry and effects
economies in the use of capital.
In underdeveloped economies, not only is the volume of savings low but a large part of it is
dissipated in conspicuous consumption and in hoards because of the lack of knowledge investment
opportunities, high liquidity preference and other non-economic forces. The secondary market
promotes conditions which take care of some of these inhibiting factors. It offers a ready market
for conversion of securities into cash and thereby encourages investment and discourages
hoarding. Again, its widely published operations and price quotations bring home to the savers
various productive and desirable opportunities of investment.

The secondary market also facilitates an investor to shift from one type of investment to another
according to his investment priorities without any significant depreciation in its real value.
Accordingly, an investor does not get tied for the better or for the worse, to the particular
enterprise whose shares he buys. It is this assurance that he does not have to sink or swim with
it that makes him willing to venture into investment. Further, by widening the opportunities
for investment, a secondary market enables investors to spread their risk by acquiring securities
of different industries, and in varying proportions, which is an essential concomitant to modern
investment.
A secondary market helps promote 'democratic capitalism'. By distributing the ownership of
securities more widely among the public, a securities market ensures that the ownership of
business is not confined to a small number of wealthy families or to big industrial-financial
conglomerates.
An efficient secondary market makes access to international capital easier. Foreign investors -
both direct and portfolio investors - will be encouraged to invest because of their strong preference
for investment in countries where their funds are complementing, rather than replacing, domestic
savings.
Thus, secondary markets serve the nation in several ways through their multifarious services.
However, to many people, the secondary market is inseparately associated with speculation
with a word that carries with it a cluster of anti-social implications and monstrously perverts its
functions and advantages. There is no denying fact that unscrupulous and unbridled speculations
breed all sorts of misfortunes. But genuine speculations, which enable the stock exchange to
render the services, stated above, need not be discouraged. As such, while the significance of the
secondary market need not belittled, it must always be subject to the maintenance of normally
conducive conditions and effective check over unscrupulous speculation.

It is important to note that both the segments of the capital market are equally important while
not being mutually exclusive. Only when a country's primary market is alive, is it possible to
ensure a good deal of activity in the secondary market because it is the primary market which
will ensure a continuous flow of securities to the secondary market, more so in developing
economies. Looking from the other angle, if a country's secondary market is only active but not
transparent and disciplined, the cult of equity and related investment in the primary market
will be difficult to be continuously developed and sustained because the liquidity which the
secondary markets impart to such investment in the hands of the investors will be adversely
affected.

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