About secondary markets

Secondary market refers to the network/system for the subsequent sale and purchase of securities. An investor can apply and get allotted a specified number of securities by the issuing company in the primary market. However, once allotted the securities can thereafter be sold and purchased in the secondary market only. An investor who wants to purchase the securities can buy these securities in the secondary market. The secondary market is market for subsequent sale/purchase and trading in the securities. A security emerges or  takes birth in the primary market but its subsequent movements take place in secondary market. The secondary market consists of that portion of the capital market where the previously issued securities are transacted. The firms do not obtain any new financing from secondary market. The secondary market provides the life-blood to any financial system in general, and to the capital market in particular.

The secondary market is represented by the stock exchanges in any capital market. The stock exchanges provide an organised market place for the investors to trade in the securities. This may be the most important function of stock exchanges. The stock exchange, theoretically speaking, is a perfectly competitive market, as a large number of sellers and buyers participate in it and the information regarding the securities is publicly available to all the investors. A stock exchange permits the security prices to be determined by the competitive forces. They are not set by negotiations off the floor, where one party might have a bargaining advantage. The bidding process flows from the demand and supply underlying each security. This means that the specific price of a security is determined, more or less, in the manner of an auction. The stock exchanges provide market in which the members of the stock exchanges (the share brokers) and the investors participate to ensure liquidity to the latter.

In India, the secondary market, represented by the stock exchanges network, is more than 100 years old when in 1875, the first stock exchange started operations in Mumbai. Gradually, stock exchanges at other places have also been established and at present, there are 23 stock exchanges operating in India. The secondary market in India got a boost when the Over the Counter Exchange of India (OTCEI) and the National Stock Exchange (NSE) were established. Out of the 23 stock exchanges, 20 stock exchanges are operating at Mumbai(BSE), Kolkata, Chennai, Ahmadabad, Delhi, Indore. Bangalore, Hyderabad, Cochin, Kanpur, Pune, Ludhiana, Guwahati, Mangalore, Patna, Jaipur, Bhubaneswar, Rajkot, Vadodara and Coimbatore. Besides, there is one ICSE established by 14 Regional Stock Exchanges. It may be noted that out of 23 stock exchanges, only 2, i.e., the NSE and the Over the Counter Exchange of India (OTCEI) have been established by the All India Financial Institutions while other stock exchanges are operating as associations or limited companies. In order to protect and safeguard the interest of the investors, the operations, functioning and working of the stock exchanges and their members (i.e., share brokers) are supervised and regulated by the Securities Contracts (Regulations) Act, 1956 and the SEBI Act, 1992.

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