SHARE TRADING IN SECONDARY MARKET

Secondary Market or Stock Exchange 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. For the general investor, the secondary market provides an efficient platform for trading of his securities. For the management of the company, secondary equity markets serve as a monitoring and control conduit—by facilitating value-enhancing control activities, enabling implementation of incentive- based management contracts, and aggregating information (via price discovery) that guides management decisions. 

Share Trading by a Retail Investor 

One can either choose to trade online or via a stockbroker or investment firm or an agent. One needs to take following steps to conduct trade in secondary market in India:

(i) Open a Bank Account: The first step towards investing in Indian stock market is to open a bank account. A bank account is required to hold the funds which would be investing in secondary market. 

(ii) Open a Demat Account: Just as a bank account is required to hold the funds, a Demat Account is required to hold and trade the securities i.e. Shares, debentures and mutual funds electronically. 

(iii) Open a trading account: After opening a Demat account, a trading account is required to trade in securities market. A trading/brokerage account allows you to purchase stocks, bonds, mutual funds, and other units by paying the broker to do the trading on your behalf. A retail investor would not be able to do trading without a trading account. Now, many banks have started providing all these services in a single unified account. The trading platform of a stock exchange is accessible only to trading members. The brokers would give buy/sell orders either on their own account or for their clients. 

(iv) Trading Mechanism: Trading at Stock exchange takes place through an open electronic limit order book, in which order matching is done by the trading computer. The market orders placed by investors are automatically matched with the best limit orders. As a result, buyers and sellers remain anonymous. The advantage of an order driven market is that it brings more transparency, by displaying all buy and sell orders in the trading system. However, in the absence of market makers, there is no guarantee that orders will be executed. 

Investors buy/sell securities on stock exchange platform by placing buy/sell orders through their stock brokers with whom they are registered as client. On successful execution of order (buy/sell), securities will be bought/sold on behalf for the client. This activity is known as buying/selling of securities on the stock exchange platform on specific days which is known as trading day. This activity is referred to as trading and is carried out by stock exchanges for a specific period called trading hours. After the trading activity is completed, the process of delivering securities by the seller and payment of funds by the buyer is called securities pay-in/funds pay-in respectively. This activity also has to be conducted within a stipulated time period. After the pay-in process is completed successfully, the buyer will get shares and the seller will get money. The above mentioned activities of, pay-in and, payout are collectively referred to as settlement process. Each settlement is identified by a unique number called settlement id/Settlement number. 

(v) Payment to Broker for purchase of shares/securities: The payment for the shares purchased is required to be done prior to the pay-in date for the relevant settlement or as otherwise provided in the Rules and Regulations of the Exchange. 

(vi) Delivery of shares to the broker for sale: The delivery of shares has to be done prior to the pay- in date for the relevant settlement or as otherwise provided in the Rules and Regulations of the Exchange and agreed with the broker/sub broker in writing. 

(vii) Receipt of money for a sale transaction and receipt of shares for a buy transaction: Brokers were required to make payment or give delivery within two working days of the pay - out day. However, as settlement cycle has been reduced fromT+3 rolling settlement to T+2, the pay out of funds and securities to the clients by the broker will be within 24 hours of the payout.