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Unit 3: Primary Market and Secondary Market

particular enterprise whose shares he buys. It is this assurance that he does not have to Notes
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.

Self Assessment

State whether the following statements are true or false:

7. Secondary market is a market where the sale of previously issued securities takes place.
8. Secondary market is a three-way market in which the investors and stockbrokers are just
as likely to be sellers as buyers.

3.5 Stock Market

Stock exchange is the term commonly used for a secondary market, which provide a place where
different types of existing securities such as shares, debentures and bonds, government securities
can be bought and sold on a regular basis. A stock exchange is generally organised as an
association, a society or a company with a limited number of members. It is open only to these
members who act as brokers for the buyers and sellers. The Securities Contract (Regulation) Act
has defined stock exchange as an “association, organisation or body of individuals, whether
incorporated or not, established for the purpose of assisting, regulating and controlling business
of buying, selling and dealing in securities”.
The main characteristics of a stock exchange are:

1. It is an organised market.
2. It provides a place where existing and approved securities can be bought and sold easily.
3. In a stock exchange, transactions take place between its members or their authorised
agents.
4. All transactions are regulated by rules and by laws of the concerned stock exchange.
5. It makes complete information available to public in regard to prices and volume of
transactions taking place every day.
It may be noted that all securities are not permitted to be traded on a recognised stock exchange.
It is allowed only in those securities (called listed securities) that have been duly approved for
the purpose by the stock exchange authorities. The method of trading nowadays, however, is
quite simple on account of the availability of on-line trading facility with the help of computers.
It is also quite fast as it takes just a few minutes to strike a deal through the brokers who may be
available close by. Similarly, on account of the system of scrip-less trading and rolling settlement,
the delivery of securities and the payment of amount involved also take very little time, say,
2 days.

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