SECURITIES MARKET

The securities market is a vital component of the capital market in India, providing a platform for raising long-term funds through the issuance and trading of securities such as stocks and bonds. The securities market is broadly divided into two segments: the primary market and the secondary market. Each segment has distinct functions, participants, and instruments.

1. Primary Market

The primary market, also known as the new issue market, is where securities are issued for the first time by corporations or governments to raise capital. Investors buy securities directly from the issuer.

Key Features:

• Initial Public Offering (IPO): Companies issue shares to the public for the first time.
• Follow-on Public Offering (FPO): Existing companies issue additional shares to raise more capital.
• Private Placement: Securities are sold to a select group of investors, usually institutional investors.
• Rights Issue: Existing shareholders are offered additional shares at a discounted price on a pro-rata basis.
• Qualified Institutional Placement (QIP): Companies issue shares only to qualified institutional buyers to raise funds quickly.

Example:

• Reliance Jio IPO: Suppose Reliance Jio decides to go public to raise ₹10,000 crore. It issues 100 million shares at ₹100 each. Investors can subscribe to the IPO, and upon allotment, they become shareholders of Reliance Jio.

2. Secondary Market

The secondary market is where previously issued securities are traded among investors. The stock exchanges facilitate these trades, providing liquidity and enabling price discovery.

Key Features:

• Stock Exchanges: Platforms where securities are bought and sold, such as the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).
• Trading Mechanism: Trades are executed through an electronic trading system, ensuring speed and efficiency.
• Regulation: Regulated by the Securities and Exchange Board of India (SEBI) to ensure transparency and protect investors.
• Market Participants: Include retail investors, institutional investors, brokers, dealers, and market makers.

Example:

• Trading Reliance Industries Shares: An investor who bought Reliance Industries shares during its IPO can sell these shares on the NSE. Another investor can buy these shares from the seller, with the transaction facilitated by a stockbroker.

Key Instruments in the Securities Market

1. Equities (Stocks)

Equities represent ownership in a company. Investors buy shares to become part-owners and potentially earn returns through dividends and capital appreciation.

Example:

• Tata Consultancy Services (TCS): An investor buys 100 shares of TCS on the BSE. If TCS declares a dividend of ₹10 per share, the investor receives ₹1,000 as dividends. Additionally, if the share price increases from ₹2,000 to ₹2,500, the investor gains ₹50,000 in capital appreciation.

2. Bonds (Debentures)

Bonds are debt instruments where the issuer borrows money from investors and promises to pay periodic interest and repay the principal at maturity.

Example:

• Government Bonds: An investor buys a 10-year government bond with a face value of ₹1 lakh and an annual interest rate of 7%. The investor receives ₹7,000 annually as interest and ₹1 lakh at the end of 10 years.

3. Mutual Funds

Mutual funds pool money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities.

Example:

• HDFC Equity Fund: An investor puts ₹50,000 into the HDFC Equity Fund, which invests in a mix of large-cap stocks. The fund’s performance depends on the underlying assets’ returns, and the investor benefits from diversification and professional management.

4. Derivatives

Derivatives are financial contracts whose value is derived from underlying assets like stocks, indices, or commodities. Common derivatives include futures and options.

Example:

• Nifty Futures: An investor buys a Nifty 50 futures contract, betting that the index will rise. If the index moves as expected, the investor can sell the contract at a higher price and profit from the difference.

Regulatory Framework

The securities market in India is primarily regulated by SEBI, which ensures the market’s integrity, protects investor interests, and promotes fair trading practices.

Key Responsibilities of SEBI:

• Regulating Stock Exchanges: Ensuring smooth and transparent functioning of stock exchanges.
• Protecting Investors: Implementing measures to protect investors from fraud and malpractices.
• Promoting Transparency: Mandating disclosure norms for listed companies to ensure transparency.
• Overseeing Market Intermediaries: Regulating brokers, mutual funds, and other market intermediaries.

Example of a Typical Transaction

Buying Shares of Infosys:

1. Investor Decision: An individual investor decides to buy 50 shares of Infosys.
2. Placing Order: The investor places a buy order through their online brokerage account.
3. Trade Execution: The order is executed on the NSE at the current market price.
4. Settlement: The transaction is settled through a clearinghouse, and the shares are transferred to the investor’s demat account.
5. Ownership: The investor becomes a shareholder of Infosys and is entitled to dividends and voting rights.

Conclusion

The securities market in India, encompassing the primary and secondary markets, is crucial for capital formation and investment. It provides a platform for companies to raise funds and for investors to buy and sell securities. Key participants include retail and institutional investors, stock exchanges, and regulatory bodies like SEBI. The market offers various instruments such as equities, bonds, mutual funds, and derivatives, each serving different investment needs and preferences. Examples like IPOs, stock trading, and bond investments illustrate the diverse opportunities within the securities market, highlighting its significance in the Indian financial landscape.