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Unit 2: Securities Market: An Overview

2.2.2 Secondary Market Notes

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.

The secondary market enables participants who hold securities to adjust their holdings in response
to changes in their assessment of risk and return. They also sell securities for cash to meet their
liquidity needs. The secondary market has further two components, namely the Over-the-Counter
(OTC) market and the exchange-traded market. OTC is different from the market place provided
by the Over the Counter Exchange of India Limited. OTC markets are essentially informal
markets where trades are negotiated. Most of the trades in government securities are in the OTC
market. All the spot trades where securities are traded for immediate delivery and payment
take place in the OTC market. The exchanges do not provide facility for spot trades in a strict
sense. Closest to spot market is the cash market where settlement takes place after some time.
Trades taking place over a trading cycle, i.e. a day under rolling settlement, are settled together
after a certain time (currently two working days). Trades executed on the National Stock Exchange
of India Limited (NSE) are cleared and settled by a clearing corporation which provides novation
and settlement guarantee. Nearly 100% of the trades settled by delivery are settled in demat
form. NSE also provides a formal trading platform for trading of a wide range of debt securities
including government securities.

A variant of secondary market is the forward market, where securities are traded for future
delivery and payment. Pure forward is out side the formal market. The versions of forward in
formal market are futures and options. In futures market, standardised securities are traded for
future delivery and settlement. These futures can be on a basket of securities like an index or an
individual security. In case of options, securities are traded for conditional future delivery.
There are two types of options – a put option permits the owner to sell a security to the writer of
options at a predetermined price while a call option permits the owner to purchase a security
from the writer of the option at a predetermined price. These options can also be on individual
stocks or basket of stocks like index. Two exchanges, namely NSE and the Bombay Stock Exchange,
(BSE) provide trading of derivatives of securities.
The past few years in many ways have been remarkable for securities market in India. It has
grown exponentially as measured in terms of amount raised from the market, number of stock
exchanges and other intermediaries, the number of listed stocks, market capitalisation, trading
volumes and turnover on stock exchanges, and investor population. Along with this growth, the
profiles of the investors, issuers and intermediaries have changed significantly. The market has
witnessed fundamental institutional changes resulting in drastic reduction in transaction costs
and significant improvements in efficiency, transparency and safety.
Reforms in the securities market, particularly the establishment and empowerment of SEBI,
market determined allocation of resources, screen based nation-wide trading, dematerialisation
and electronic transfer of securities, rolling settlement and ban on deferral products, sophisticated
risk management and derivatives trading, have greatly improved the regulatory framework
and efficiency of trading and settlement. Indian market is now comparable to many developed
markets in terms of a number of qualitative parameters.

Stock Market Indicators

The most commonly used indicator of stock market development is the size of the market
measured by stock market capitalization (the value of listed shares on the country’s exchanges)
to GDP ratio. This ratio has improved significantly in India in recent years. At the end of the year

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