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Secondary Market Terminology

This chapter throws light on the stakeholders in the secondary market, their roles and also basic explanations of concepts which are essential for trading/investing.

Gopal Kavalireddi
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In comparison with the primary market, the secondary market is considerably large, with many terms, which are defined as follows

 

Stock Broker

An intermediary between the various investors and the stock exchange, facilitating the smooth transaction process of buying and selling of shares for a commission is termed as a Stock Broker or a Trading Member. A registered member of the stock exchange, the stockbroker abiding by the rules and regulations set by SEBI, performs the job of a financial agent by buying and selling of securities, as per the instructions of the clients.

Every client needs to avail the services of a registered stockbroker/sub-broker only. A broker's registration number begins with the letters "INB" and that of a sub-broker with the letters "INS". For the brokers of the derivatives segment, the registration number begins with the letters "INF".

Membership of the Exchange is open to corporate entities, limited liability partnerships, partnership firms and individuals who fulfill the eligibility criteria laid down by SEBI and stock exchange. The various categories of members are:

 

Trading Member

A membership category which enables a member to execute trades on his own account as well as on account of his clients but, clearing and settlement of trades executed through the Trading Member would have to be done through a Trading-cum-Clearing Member or Professional Clearing Member of the Exchange.

 

Trading Cum Self Clearing Member

A membership category which permits a member to execute trades and to clear and settle the trades executed on his own account as well as on account of his clients.

 

Trading Cum Clearing Member

A membership category which allows a member to execute trades on his own account as well as on account of his clients and to clear and settle trades executed by themselves as well as by other trading members who choose to use clearing services of the member.

 

Professional Clearing Member

A membership category which authorizes a member to clear and settle trades of such members of the Exchange who choose to clear and settle their trades through this member.

 

Sub Broker

Any person while not being a member of the stock exchange, but performing the role of a financial representative, on behalf of a trading member in assisting the investors in buying, selling or dealing in securities is termed as a Sub Broker. All sub-brokers are required to obtain a certificate of registration from SEBI, lacking which, they are not permitted to deal in securities.

 

Authorized Person

A newer version of the sub-brokerage, an entity affiliated to a trading member as a representative is termed as an Authorized Person. The obligations and liabilities of an Authorized Person are similar to that of a Sub-broker. He is appointed by a stockbroker including trading member and provides access to trading platform of a stock exchange as an agent of the stockbroker

A point of note is that the same person cannot act as sub-broker with one stockbroker and as Authorised Person with another stockbroker of the same stock exchange at a given time. Authorized Person can receive remuneration - fees, charges, commission, salary, etc. for his services only from the stockbroker and shall not charge any amount from the clients.

 

Demat Account

An account that provides the facility of holding shares and other financial instruments in an electronic format is termed as a Dematerialized Account, or in common parlance, Demat Account. This is essential for every client so as to assist in the speedy processing of the transfer of shares or securities from the seller to the buyer. This account is provided by depositories such as NSDL and CDSL through intermediaries like stock brokers. Based on parameters like the volume of stocks held in the account and the terms & conditions prescribed by the depository and the stockbroker, the charges vary from client to client. A maintenance charge will be levied by the depository and payable by the customer.

 

Trading Account

For any investor to buy and sell shares without the help of a broker, an online platform is essential. Brokerages provide access to such a platform online through which transactions can be executed. This account is termed as the Trading Account, which is unique to each client called the Unique Client Code (UCC).  It is a much better option as compared to offline trading which requires the clients to take the assistance of a broker by placing a phone call to execute the trades.

Also, since it is a time-consuming process and with the widespread usage of the internet on computers and mobile devices, most clients prefer to open an online trading account with either full service or discount brokerages. Every client needs to use the trading account in conjunction with the demat account, in the sense that, buying/selling is done through the trading account and the purchased securities are held in the demat account.

 

Brokerage Firm

A firm of brokers which facilitates the transactional activities between buyers and sellers is termed as a Brokerage firm. There are two types of brokerage firms: Full-Service Brokerages and Discount Brokerages.

 

Full-Service Brokerages

All registered brokerage firms facilitate the transaction process of buying and selling securities. In addition to that, some brokerages offer additional value-added products & services like demat account, research & advisory services, financial & investment planning with regular updates on investments. Such firms providing an all-encompassing bundle of products and services are termed as Full-Service Brokerage Firms.

To incorporate the cost of providing the products and all the associated services, the brokerage or the commission charged to the clients is much higher, as it is a percentage based brokerage fee without an upper cap. These high costs eat into the profits earned by the client. This option is preferred by clients who don’t have sufficient knowledge of the stocks and the working nature of the stock markets while requiring customized support in the process of investing and financial planning.

 

Discount Brokerages

A registered broker-dealer firm which provides a no-frill execution of trades through a computerized terminal with a trading account is called a Discount Brokerage Firm. These firms provide demat accounts along with the trading accounts. Discount brokerages don’t provide any advisory services or other value-added products to maintain the low transaction charges for the clients. This is the preferred option for investors who are cost-conscious, are knowledgeable about investments, and can manage without the additional services offered by a full service brokerage. The brokerage charged by these firms is extremely low, with an upper cap on each transaction.

 

Brokerage

The commission paid by the client to the broker for the support received in executing the transactions is termed as Brokerage. The brokerage will be charged within the limits prescribed by SEBI, which is subjected to a ceiling of 2.5% of the traded value, exclusive of statutory taxes. The maximum brokerage is inclusive of the sub-broker fees. The brokerage fee various from full-time brokerages to discount brokerages and even between each group of brokerages also.

Hence, online discount brokerages are the preferred choice for most investors in recent times. These services provide access to trading on a user-friendly platform that does not require interaction with a broker or advisor, thereby lesser brokerage.

 

Trading

The process of holding financial instruments like stocks for a short period of time is termed as Trading. This involves buying securities and holding it for a short duration and selling the same securities at a higher price, thereby realizing a profit. This method is normally adopted by individuals/institutions who have sufficient knowledge of the short term movement of the stock market and buy the stocks showing an uptrend, to take advantage of the increase in price by selling for a gain on the amount invested.

Simply put, trading is a process of taking advantage of the small price changes in the stocks for a profit. This is a high risk, high reward manner of earning money. Only when an order is executed, it is termed as a trade.

 

Trading session

Every day, the stock market opens and closes at the same time to facilitate the buying and selling of stocks by various investors. The stock market opens with the pre-bid time from 9:00 a.m. to 9:15 a.m., where orders are placed by the bidders. No trading happens during this time and the pre-bid session is used for the price discovery of any stock for that day.

Post 9:15 a.m., the stock market opens to execute those bids as well as to execute the continuous orders being placed by buyers and sellers. This process ends with the closing of the stock market at 3:30 p.m. This complete process of pre-bid and trading time between 9:00 a.m. to 3:30 p.m. is termed as One Trading Session. The stock market works only on weekdays (unless there are prior announced trading holidays, due to festivals or national holidays, which can be tracked on our Holiday Calendar). The market timings and number of trading hours are subjected to change only with the approval of the market regulator.

 

Intraday Trading

Incase the trading is done for a day, then it is termed as Intraday Trading, where the stocks are bought/sold when the stock markets open for trade in the morning and sold/bought back again before the close of stock markets. The process of closing the open positions of trade is termed as Square Off. Since the transaction is a two-way process (buying and selling) the entity or individual doesn’t receive any securities in his demat account, but only the adjustment of either profit or loss due to the transaction.

In intraday trading, an investor can buy and sell shares without paying the full cost of the shares. The brokerage for intraday trading is lower than other form of trading.

 

Margin Trading / Margin Money

For buying shares in the stock market, the investor needs to have sufficient funds available in his/her trading account. This can be done by transferring the funds from the bank savings account to the trading account. A minimum amount has to be maintained in the account at all times. Incase, the investor wants to buy shares more than the amount of available funds, then they can do so by borrowing money from the broker, who provides the option in lieu of a collateral.

This process of buying stocks without full amount in the trading account is called Margin Trading and the amount made available by the broker to buy the shares is called Margin Money.

By considering the earlier existing shares or cash in the account as a collateral, the broker provides the loan to buy shares. In case of intraday trading, since the positions are squared off, only the profit or loss at the end of trading day is indicated. In case of delivery trading, the investor has to make the payment within the allotted time, failing which the broker will liquidate the collateral as well as the purchased securities, to make good on his loan.

 

Delivery Trading

Unlike intraday trading, if the investor buys the shares and doesn’t sell them back before ‘T+2 days’, then it is considered to be Delivery Trading. Investors can buy the shares and hold them for any time period and sell the shares as per their requirement and convenience. Long term investors normally hold the shares for a very long period of time to gain capital appreciation as per the business prospects of the invested company. Short term investors can hold the shares over short time frames, ranging from overnight to a few weeks or months.

The date of transaction/purchase is referred to as ‘T’ and the payment for the delivery traded shares has to be made within 2 days from the date of purchase (T+2).

 

Pay-In / Pay-Out Days

Pay-In day is referred to as the day when the brokers have to make payment or delivery of securities to the exchange. Similarly, Pay-Out day is the day when the exchange makes payment or delivery of securities to the broker. Settlement cycle is on T+2 rolling settlement basis. The exchanges have to ensure that the pay out of funds and securities to the clients is done by the broker within 24 hours of the pay-out.

 

Contract Note

A documentary support provided by the stock broker to all clients for the trades executed on any trading day is termed as the Contract Note. This legal document, signed and issued by the broker within 24 hours of the completion of transaction, provides the confirmation of all trades executed by the broker on behalf of the clients, based on client request. This document is critical for settling any disputes or claims arising between the trading member and client.

A valid contract note should be in the prescribed format which includes the information related to broker, trade details with date, client code, order details of quantity and price of the shares bought or sold, including the charged brokerage and taxation information.

 

Settlement Cycle

The transactions conducted during trading, have a fixed timeline for the settlement of trades as per terms of contract. This timeline is termed as Settlement Cycle. Settlement cycle is a two-way process which involves transfer of funds and securities to the concerned parties by the settlement date.

For equity, all trades are settled on T+2 settlement cycle. For derivatives, currency and commodities, all trades are being mark to market at the closing price of contract and mark to market requirements are settled at T+1. For arriving at the settlement day, all pre-announced holidays, which include bank holidays, stock exchange holidays, Saturdays and Sundays are excluded.

secondary_market_terminology_settlement_cycle

 

Rolling Settlement

On each trading day, trades executed during the day are settled based on the net outstanding for the day and is settled on a rolling basis. This process is termed as Rolling Settlement. At present, trades in rolling settlement are settled on a T+2 basis, i.e., on the second working day. It implies that trades conducted on Monday are obligatorily settled on Wednesday. Similarly, trades conducted on Tuesday are settled on Thursday and likewise, continuing with the T+2 basis.

 

Short Selling

Anticipating a drop in price of any particular share, an investor can sell the stock without having possession and later, when the stock price drops, the investor can buy back the share, thereby making a profit. This style of trading is called Short Selling. Traders adopt this methodology, especially when the stock market is falling and is in a continuous downtrend, as the market tends to fall faster than the rate at which it moves up. Short selling involves precise timing of the market to make a profit and at the same time, involves considerable risk, in case of market reversing its fall and moving up back again.

 

Auction

By the end of a trading day, if the seller is unable to deliver the securities sold to the buyer, the broker has to buy the securities from the market and make good of the buyer’s order. This process by which the securities are procured on behalf of the defaulting seller is known as Auction. At any time, when the shares are short sold and the same are not delivered for the pay-in to the exchange, then the shares go in for auction, where the shares are purchased on behalf of the client, in the auction market and delivered to the actual buyer.

 

Trading Volumes

The total number of shares bought & sold, of any one single company is referred to as the trading volumes of that company. Trading volumes indicate the liquidity of the company’s stock. Higher traded volumes mean higher liquidity and ease of trading in that particular company’s shares. More the number of buyers and sellers, higher are the traded volumes. In a rising market, the traded volumes are generally higher and vice versa. Every investor should look at the traded volumes over various time frames like 1 week, 1 month, 3 months, 6 months, 1 year to understand the general investor interest in the stock.

 

Volatility

The prices of listed stocks rise and fall due to the interest of buyers and sellers. The stock market by virtue of its nature doesn’t go up continuously and at the same time doesn’t go down continuously. Depending upon the effect of macro and micro factors which could be either internal or external, the stock market sometimes rises up by a lot and can also fall by a lot.

These sudden fluctuations in the price of a stock or the stock market in general, are referred to as volatile conditions and is termed as Volatility in the stock market. To measure this volatility, the VIX India Index has been introduced, which indicates the uncertainty and risk level in the stock market.

 

Stock Index

There are more than 5000+ companies listed on the Bombay Stock Exchange (BSE) and around 1600+ companies on the National Stock Exchange (NSE). To gauge the movement of all these stocks at any given time is a cumbersome process for an average investor. Hence, representation has been designed which encompasses a basket of similar stocks, to indicate the trend of the market. This representation is termed as a Stock Market Index or simply, Index.

The value of the Index is calculated from the value of that particular basket of stocks. The daily changes in the price of the stocks change the index value and hence represents the changes in the stock market. The two major indices in Indian Stock Market are the S&P BSE SENSEX, represented by a basket of 30 stocks and the NSE Nifty50, represented by a basket of 50 stocks. There are many other Nifty indices like the Nifty Bank, Nifty Midcap50, Nifty Mid100, Nifty Infra, Nifty IT, Nifty Realty etc. These indices and their constitution will be explained in detail at a later time.

 

Bull Run / Bull Market

It is a metaphorical representation of a bull attacking its opponents by thrusting its horns upwards in the air, indicating an uptrend. If the stock market on the whole, is rising continuously over an extended period of time, then the market is said to be in a Bull Phase or a Bull Run, and is termed as Bull Market. The same is applicable for any particular Index or an individual stock also, where the interest of the buyers is high and the index/stock price rises continuously, with the investors paying a higher price for owning a group of stocks or a particular stock.

A bull phase is witnessed when the economy of a country is thriving, and the investors are extremely optimistic, by taking advantage of all the growth/business opportunities via investment in stocks. During this phase, the traded volumes and investor interest in stocks are extremely high. Normally, if the stock market rises by an average of 20%, then it is said to be a bull market.

 

Bear Run / Bear Market

Another metaphorical representation of a bear attacking is opponents by swiping downwards to the ground, indicating a downtrend. The Bear Market by definition is the exact opposite of a bull market, where the investors are extremely pessimistic about the growth prospects of a company or the economy in general and are continuously selling their stocks. During this phase, the market keeps trending lower and lower due to the heavy selling by investors on a continuous basis, to protect their profits or capital.

Faced with uncertainty in economic conditions, investors are very fearful of any further investment for a long period of time. If the stock market falls by an average of 20% or more, then it is said to be a bear market.

 

Investor colloquialism

There are many colloquial terms used in reference to the types of Investors.

  1. Bull: An investor who is very optimistic of the future prospects of a stock/stock market and opines that the market is in an upward trend is represented as a Bull.

  2. Bear: An investor who is very pessimistic of the future prospects of the stock market in general and believes that the market is in a downward trend is represented as a Bear.

  3. Stag: An investor who buys the shares of a company during IPO and sells them during the listing on the stock exchange for a quick profit is termed as a Stag.

  4. Chicken: An investor who is fearful of the risks of the stock market and invests only in risk-free investments like fixed deposits or bonds is named a Chicken.

  5. Pig: An investor who is willing to take a high risk to make a quick return, based on hearsay or unconfirmed information is classified as a Pig.

  6. Wolf: An investor who has access to resources and uses unscrupulous methods and manipulates the system to make returns is denoted as a Wolf.

  7. Ostrich: An investor who, in a bear market, feigns ignorance while refusing to accept a downtrend and assumes that everything is fine, exhibiting ostrich-type behavior (burying head in the sand) is signified as an Ostrich.

 

Investing (Direct Equity)

A disciplined methodology of wealth creation by buying the shares of a company, after an in-depth analysis of business prospects & financials of that company, and holding them for a long term, is characterized as Investing. Investing directly into stocks is termed as Direct Equity, where the fluctuations in the stock affect the invested capital directly. Investments required are considerable large to own a group of stocks in sufficient quantities, so as to build a large corpus to meet the necessary financial goals.

Investing is a long drawn out process, where investments are held for a considerable period, while gains are calculated based on the dividends given by the company, additional shares issued and appreciation of the invested capital. Investing involves gathering and understanding of a particular company’s management quality, business prospects, operations, financials, future prospects and growth potential. The risks involved in investing are comparatively lesser than in trading, as the short term fluctuations of the stock price are mitigated with the passage of time. Investing should be done on the basis of each individual’s risk appetite, financial capabilities, expected returns and time period.

 

Investing (Indirect Equity)

Investing in financial instruments which are indirectly linked to equities where investments are managed professionally is termed as Indirect Equity Investing. A mutual fund is one such financial instrument, where a professional investment manager pools money from various investors and invests in a group of stocks or debt instruments, thereby providing better management of investments for a fee. Capital necessarily need not be large to be part of the fund and the knowledge of financial instruments is not required for every individual, however, a basic understanding of the performance and ability to review the investments from time to time is desirable.

 

Portfolio

The combination of various investment avenues of any individual or an entity as a set is termed as Portfolio. To help achieve each investor’s financial goals, these investment avenues could be a mix of equity and debt instruments like shares, mutual funds, bonds, cash, fixed deposits, insurance & pension plans, retirement policies, as well as precious metals like gold or silver, real estate etc. These portfolios can be managed and reviewed either by individuals with considerable knowledge on their own or through professional entities for a specified fee.

 

Diversification

The portfolio is an important concept, as investing in various assets mitigates the risk associated with each asset at an overall level and the returns are also spread out at the same time. The process of mitigating the inherent risk of each asset by being a part of the portfolio is termed as Diversification. This is a risk mitigation process, as poor performance of one asset class will not severely impact the returns of the complete portfolio. A well-diversified portfolio must invest in the stocks belonging to various sectors, equity & debt mutual funds, bonds, gold, real estate etc. to protect the downtrend or poor performance of any one asset class.

 

Next Chapter

Trading Process and its Terminology

13 Lessons

Find explanations of basic price related terminologies which are used in trading/investing.

Order Types

13 Lessons

Get an understanding of the various order types. Traders/Investors can use order types as per their requirements.

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Samika commented on April 22nd, 2019 at 12:22 PM  
Has cleared up a lot of my doubts and questions. Good going!


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