Primary Market

Also known as “New Issue Market”

Success of the capital market depends on it.

Is the Market for new issuers

Can be directly bought from the shareholders

Small and medium scale business, enter the primary market to raise money From the public.

Accelerates the process of capital formation in a country’s Economy.

Primary Market

Three methods to issue primary market

Rights Issue,

Initial Public Offer(IPO),

Preferential Issue

Feature of Primary Market

This is the market for new long term equity capital.

The primary market is the market where the securities are sold for the first time.

In a primary issue, the securities are issued by the company directly to investors.

The company receives the money and issue new security certificates to the investors.

Primary issues are used by companies for the purpose of setting up news new business offer for expanding or modernizing the existing business.

The new issue market does not include certain other sources of new long term external finance.

Borrowers in the new issue market may be raising capital for converting private capital into public capital; this is known as “going public.”

The Need for Primary Market.

To raise funds for certain purpose.

To create market for new issues of securities.

To establish the magnitude of the market.

To mobilize Resources the economy.

For overall development of companies.

Functions of primary market.

Household savings

Global Investments

Sale of Government Securities.

Primary market Participants.

Market Risk.

Importance.

It study’s needs, wants and expectations of the customers

It finds out reactions of customers to products of the company.

It evaluates company’s sales promotion measures for suitable adjustments and improvements

It studies current marketing problems and opportunities for suitable follow up.

It suggest introduction of new products, modification of existing products.

It studies marketing competition, channel of distribution and pricing for suitable changes if necessary.

It finds methods for making the product popular and raising its goodwill and marketing reputation.

Secondary Market.

Secondary Market refers to a market where securities are traded after being initially offered to the public in 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.

Difference between the primary market and the secondary market.

In the primary market, securities are offered to pubic for subscription for the purpose of raising capital or fund.

Secondary market is an equity trading avenue in which already existing/pre-issued securities are traded amongst investors. Secondary market could be either auction or dealer market. While stock exchange is the part of an auction market.

Products deal in the secondary markets

Equity Shares

Government securities

Debentures

Bond.

Role of Broker and Sub-Broker in the Secondary market.

A broker is a member of a recognized stock exchange, who is permitted to do trades on the screen-based trading system of different stock exchanges. He is enrolled as a member with the concerned exchange and is registered.

A sub broker is a person who is registered with SECP as such and is affiliated to a member of a recognized stock exchange.

The process of trading.

Step 1. Investors/trader decides to trade.

Step 2. Places order with a broker to buy/sell the required quantity of respective securities.

Step 3. Best priced order matches based on price-time priority.

Step 4. Order execution is electronically communicated to the broker’s terminal.

Step 5. Trade confirmation slip issued to the investor/trader by the broker.

Step 6. Within 24 hours of trade execution, contract note is issued to the investor/trader by the broker.

Step 7. Pay-out of funds and securities before T+2 day.

Step 8. Pay-out of funds and securities on T+2 day.

Brokerage and Capital gains tax.

The maximum brokerage that can be charged by a broker has been specified in the Stock Exchange Regulations.

Capital gains Tax is levied on all transactions done on the stock exchanges at rates prescribed by the Federal Government from time to time.

Corporatization of stock exchanges.

Corporatization is the process of converting the organizational structure of the stock exchange from a non-corporate structure to a corporate structure.

Demutualization of stock Exchanges

Demutualization refers to the transition process of an exchange from a “mutually-owned” association to a company “owned by shareholders”.

Demutualized exchange different from a mutual exchange.

A demutualized exchange, on the other hand, has all these three functions clearly segregated, i.e. the ownership, management and trading are in separate hands.

What is day trading?

Day trading refers to buying and selling of securities within the same trading day such that all positions will be closed before the market closes of the trading day. In the securities market only retail investors are allowed to day trade.

Direct market Access.

Direct Market Access (DMA) is a facility which allows brokers to offer clients direct access to the exchange trading system through the broker’s infrastructure without manual intervention by the broker.

Trading Mechanics The Order Flows: Floor Trading

Buyer/Seller: Place long/short orders to FCM

FCM: Receives orders, sends to Floor Broker

Floor Broker: Receives orders and takes to the floor

Trading “Pits”: Orders executed by “open Outcry”

Floor Broker: Confirms transaction to the FCM

FCM: Confirms transaction to the buyer/seller

Buyer/Seller: Has Long/Short position on the contract

Futures Commission Merchants (FCM)

The FCM is a central institution in the futures industry, that performs functions similar to a brokerage house in the securities industry.

Futures traders first have to open an account at a FCM

Futures traders with FCM accounts give their trading orders to an account executive employed at the FCM

The FCM executives give customer orders to floor brokers to execute the orders on the floor of an exchange

The FCM collects margin balance from the customers (traders), maintains customer money balance, and records and reports all trading activity of its customers

Margins or Performance Bonds

Before trading a futures contract, the prospective trader must deposit funds with an FCM – the deposit serves as a performance bond and is referred to as initial margin

An initial margin is a deposit to cover losses the trader may incur on a futures contract as it is marked-to-market.

A maintenance margin is a minimum amount of money that must be maintained on deposit in a trader’s account. Maintenance margin is a lesser amount than the initial margin - typically 75% of the initial margin

A margin call is a demand for an additional deposit to bring a trader’s account up to the initial performance bond level.

Traders post the funds for performance bond with their FCMs

Variation Margin

To maintain customer deposits at the level of the initial margin (or at the maintenance margin level), clearinghouses require the member FCMs to make daily adjustments to customer accounts in response to changes in the value of customer positions.

To maintain initial margin levels, FCMs require customers to make daily payments equal to the losses on their futures positions, while FCMs in turn pay to customers the gains on their positions.

These daily payments are calculated by marking-to-market customer accounts – revaluing accounts based on daily settlement prices

These daily payments are called variation margins, and must generally be made before the market opens on the next trading day.

Floor Brokers

Floor brokers take the responsibility for executing the orders to trade futures contracts that are accepted by FCMs. Self-employed individual members of the exchange who act as agents for

FCMs and other exchange members

May trade customer accounts as well as their own accounts – Dual trading

Floor brokers specialize in particular commodities

Floor brokers are subject to CFTC regulations

Exchange floors are organized into several different pits (physical locations), where different futures contracts are traded.

The Clearinghouse

Every futures exchange has a clearing house associated with it which clears all transactions of that exchange. The clearing house regulates, monitors, and protects the clearing members

Exchange members provide daily reports of all futures trades to the clearing house, which matches shorts against longs and provide a daily reconciliation

For each member, the clearing house computes daily net gain and loss and transfer funds from the account in loss to the account in gain

Collects security deposits (margins or performance bonds) from the members and customers

Regulates, monitors, and protects each trader

Types of Futures Orders

Market Order (MKT)

An order placed to buy or sell at the market means that the order should be executed at the best possible price immediately following the time it is received by the floor broker on the trading floor.

In this case, the customer is less concerned about the price s/he will receive, and more concerned with the speed of execution.

Limit Orders

A limit order is used when the customer wants to buy (sell) at a specified price below (above) the current market price.

The order must be filled either at the price specified on the order or at a better price.

The advantage of a limit order is that a trader knows the worst price he will receive if his order is executed.

Types of Futures Orders

Market If Touched (MIT)

When the market reaches the specified limit price, an MIT order becomes a market order for immediate execution

Market-on-Close (MOC)

A MOC order instructs the floor broker to buy or sell an specified contract for the customer at the market during the official closing period for that contract.

The actual execution price need not be the last sale price which occurred, but it must fall within the range of prices traded during the official closing period for that contract on the exchange that day

Types of Futures Orders

Stop Order

In contrast to limit orders, a buy-stop order is placed at a price above the current market price, and a sell-stop order is placed at a price below the current market price

Stop orders become market orders when the designated price limit is reached

Stop orders are often used to limit losses on open futures positions.