What is Securities? Stock Market Course

2.1 What Are Securities?

Securities are tradable financial instruments issued by a firm or the government that grant ownership, debt, or the ability to purchase, sell, or trade an option. The exchange markets are where securities are traded.

Stocks, bonds, mutual funds, interest-bearing Treasury bills, notes, derivatives, warrants, and debentures are all examples of securities. Interests in oil-drilling projects are also classified as securities. The issuer of the security is the legal entity that issues securities.

The level of inherent risk varies among securities. Equities, for example, are regarded riskier than bonds, although some equities are also riskier than others. An investor chooses the appropriate securities based on the level of risk he is willing to take. Furthermore, the liquidity of securities varies. Highly liquid securities, such as bonds, stocks, and money market instruments, are traded more often because investors can raise their price by purchasing more securities and achieving a larger return on investment.

2.2 Securities Market Functions

Securities Markets is a place where buyers and sellers of securities can enter into transactions to purchase and sell shares, bonds, debentures etc. Further, it performs an important role of enabling corporates, entrepreneurs to raise resources for their companies and business ventures through public issues. Transfer of resources from those having idle resources (investors) to others who have a need for them (corporates) is most efficiently achieved through the securities market. Stated formally, securities markets provide channels for reallocation of savings to investments and entrepreneurship. Savings are linked to investments by a variety of intermediaries, through a range of financial products, called “Securities”.

2.3 The Securities Market Regulators

Indian Capital Markets are regulated and watched by the Ministry of Finance, The Securities and Exchange Board of India and The Reserve Bank of India.

The Ministry of Finance regulates through the Department of Economic Affairs-Capital Markets Division. The division is responsible for formulating the lines related to the orderly growth and development of the securities markets (i.e. share, debt and derivatives) as well as protecting the interest of the investors.

In particular, it’s responsible for

• Structure regulatory and market institutions,
• Strengthening investor protection operation, and
• Handing a potent legislative framework for securities demands.
• Institutional reforms in the securities markets.

2.4 What Is SEBI And Its Role?

The Securities and Exchange Board of India (SEBI) – Regulator of the financial markets in India, was established on 12th April 1988.

It plays an important capacity in regulating the securities market of India. Thereby it’s important to know the purpose and objective of the same. The Securities and Exchange Board of India (SEBI) is the regulatory authority in India established under Section 3 of SEBI Act, 1992. SEBI Act, 1992 provides for establishment of Securities and Exchange Board of India (SEBI) with statutory powers for

(a) protecting the interests of investors in securities

(b) promoting the development of the securities market and

(c) regulating the securities market.

Its regulatory jurisdiction extends over corporations in the issuance of capital and transfer of securities, in addition to all intermediaries and persons associated with the securities market. SEBI has been obligated to perform the aforesaid functions by such measures as it thinks fit. In particular, it has powers for:

• Regulating the business in stock exchanges and any other securities markets
• Registering and regulating the working of stock brokers, sub-brokers etc.
• Promoting and regulating self-regulatory organizations
• Prohibiting fraudulent and unfair trade practices
• Calling for information from, undertaking inspection, conducting inquiries and audits of the stock exchanges, intermediaries, self-regulatory organizations, mutual funds and other persons associated with the securities market.

SEBI Roles

This regulatory authority acts as a watchdog for all the capital demand parties and its main purpose is to handle such a milieu for the fiscal market enthusiasts that loosen the efficient and smooth working of the securities market.

To make this happen, it ensures that the three main parties of the financial market are taken care of, i.e., issuers of securities, investors, and financial intermediates.

• Issuers of securities: These are entities in the corporate field that raise funds from various sources in the demand. This organization makes sure that they get a healthy and transparent milieu for their necessities.
• Investors: Investors are the ones who keep the markets active. This regulatory authority is responsible for maintaining an environment that’s free from malpractices to restore the confidence of the general public who invest their hard- earned money in the markets.
• Fiscal intermediaries: These are the people who act as middlemen between the issuers and investors. They make the monetary transactions smooth and safe.

Functions of SEBI

1. Protective functions- As the name suggests, these functions are performed by SEBI to keep the interest of investors and other monetary parties. It includes-

• Checking price rigging
• Prevent insider trading
• Promote fair practices
• Create advertence among investors
• Ban fraudulent and unfair trade practices.

2. Regulatory functions- These functions are largely performed to keep a check on the functioning of the business in the financial markets. These functions include-

• Regulation of takeover of companies
• Conducting inquiries and audit of exchanges
• Registration of brokers, sub-brokers, merchant bankers etc.
• Levying of fees
• Performing and exercising powers
• Register and regulate credit rating agency

3. Development functions- This regulatory authority performs certain development functions also that include but they aren’t limited to-

• Imparting training to middlemen
• Promotion of fair trading and reduction of malpractices
• Carry out research work
• Encouraging self- regulating organizations
• Buy- retail mutual funds directly from AMC through a broke

Objectives of SEBI

• Protection to the investors- The primary aim of SEBI is to protect the interests of people in the stock demand and deliver a healthy environment for them.
• Prevention of malpractices- This was the reason why SEBI was formed. Among the main aims, obviating malpractices is one of them.
• Fair and proper functioning- SEBI is responsible for the orderly functioning of the capital demands and keeps a close check over the exercise of the pecuniary intermediates like brokers, sub-brokers, etc.

2.5 Participants Involved in Securities Market

• Indian Retail Participants:

Individual Indian citizens who buy or sell for personal gain.

• NRIs and OCIs

These are Indians who live in other countries. Substantial Indian corporations, such as the Life Insurance Corporation of India (LIC), invest large sums in numerous equities. It also includes corporations and financial institutions.

• Companies

Firms that invest pooled money through mutual funds are known as Indian asset management companies. Their day-to-day business is investment management.

• Large foreign asset management

These are businesses which invest in the Indian stock market as well.

Everyone wants to make money, and in the rush to make the most, they may engage in unethical acts. India has an authoritative organization called SEBI to keep an eye on these fraudulent acts.

2.6 Financial Intermediaries

The stock market environment is made up of a number of different units. SEBI regulates all of these organizations. Financial intermediaries in the stock market are the most essential entities that have diverse obligations in-between transactions. Financial intermediaries make up the stock market. Various financial intermediaries play their assigned responsibilities in the process from the time a security is purchased until the time it is sold.

The four main financial intermediaries in stock market are:

1. Stock Broker

A stock broker license is issued by a registered stock exchange to a corporate entity known as a stock broker. The stock exchange registers this corporate organization as a trading member directly. Before a business company may obtain a broker license, it must meet a number of requirements.

A stock broker serves as a doorway to the stock exchange for individual traders and investors. You should open a trading account with a stock broker who can accommodate your needs.

A stock exchange does not allow individuals to place orders directly. If SEBI allowed such, it would be impossible to monitor and supervise the quality of trading. Regulating the stock markets is easier as all investors have to transact through a stockbroker and all stockbrokers are registered with the stock exchanges. The following are some of the basic services supplied by brokers:

• An overview of the stock market
• Provide you with access to the stock market and the ability to trade.
• Provide you with trading margins.
• Provide a platform for trade. Installable software or a web-based application.
• The facility to call and trade.
• For transactions, issue contract notes.
• Facilitate the funds between the trading account and the bank account.
• Login to your account’s back office to view a summary of your account.
• Assistance with customer service
• Return report for financial year

2. Depository And Depository Participant

A share represents a percentage of a company’s ownership. You’ll need confirmation that you’ve purchased stock in a corporation. This proof is in written format, and it certifies that you have purchased a specific number of shares in a corporation. This was formerly only available in paper format. Such paper formats were difficult to maintain since they require regular maintenance. This issue was resolved in 1996 when shares were dematerialized (digital format) and referred to as demat form. These demat shares require a secure electronic storage location. A demat account was created to meet this demand.

A depository is a financial intermediary that provides demat account services. This demat account serves as a digital safe deposit box for electronic securities. Both a trading and a demat account are linked. There are now only two depositories in India that offer demat account services.

• NSDL (National Securities Depository Limited)
• CDS (Central Depository Services (India) Limited)

There isn’t much of a difference between the two, and they both follow SEBI’s tight requirements. We can’t go to the stock exchange to trade, either. To do so, we’ll need a broker. A depository participant (DP) is also required for the demat account. A depository agent (DP) is a person who acts on behalf of the depository. SEBI regulations also apply to DP. When you open a trading account, your broker will also provide you with a demat account.

3. Banks

A bank is required wherever there is money and a need for regulation. When an investor buys stock, they must first transfer money to the broker. They also need to receive payments from the broker when they sell them. As a result, a bank is an important financial intermediary in the capital market. It enables SEBI to maintain a controlled environment during fund transfers.

4. Clearing Corporations

A clearinghouse, often known as a clearing corporation, is not a new concept in the financial world. For years, banks have relied on clearinghouses to settle check payments. A clearinghouse ensures that the check is legitimate and that the funds are sent to the designated recipient in the financial system. They are wholly owned subsidiaries of NSE & BSE. The job of a clearing corporation is to make sure that all the trades are closed successfully.

There are three clearing corporations in India viz.

• NSCCL (National Security Clearing Corporation Ltd)
• ICCL (Indian Clearing Corporation)
• MCX CCL (The Multi Commodity Exchange Clearing Corporation Ltd.)

(NSSCL is a clearing corporation of NSE and ICCL is of BSE).

Functions Of Clearing Corporations

• Providing clearing and settlement functions
• Ensuring transparency
• Improving market efficiency
• Reduces/ eliminates the need for post-settlement arbitrations, etc.

Transactions in the capital market proceed through three stages: trading, clearing, and settlement. By including the above-mentioned intermediates, SEBI has created mechanisms to ensure that there is a limited probability of a fraud or a scam at every stage, increasing transparency and lowering risk.

The job of intermediaries in the capital market is specified to make investors feel secure and to enhance the securities market in India, despite the fact that the process flow is not overly complicated.

It is advisable to conduct transactions through an intermediary as you get guidance if you are transacting through an intermediary. Choose a SEBI registered intermediary, as they are accountable for its activities.

2.7  Securities Market Segment

The securities market has two interdependent segments: the primary (new issues) market and the secondary market. The primary market provides the channel for sale of new securities while the secondary market deals in securities previously issued.

The capital market, also known as the securities market, is a place where investors’ funds are made available to enterprises and governments for project development.

Similarly, if a firm needs money to grow its operations, it can issue shares in the stock market, which investors can purchase. The bond market and the securities market are both part of the capital market.

It acts as a conduit for surplus funds to be moved to organizations that require financing for their operations. These funds are being invested in a variety of profitable sectors by the companies.

Types of Capital Market

1. Primary Market

The Primary market is a fresh issue market where new securities are primarily issued. It is a location where financial instruments are traded for the first time, commonly known as an Initial Public Offering (IPO).

2. Secondary Market:

The secondary market is a sort of capital market in which existing securities are traded. It is called the stock market, and it is where investors buy and sell assets. Call markets and continuous trading markets are two types of secondary markets. Participants in a call market can only make transactions when the market is called, which normally happens once a day. In a continuous trading market, on the other hand, participants can plan and execute trades at any moment the market is open. The majority of markets, including alternative trading venues, operate on a continuous basis.

Because all traders interested in trading (or orders expressing their interests) are present at the same time and location, buyers may readily find sellers and vice versa in call markets. The secondary market serves the following purposes:

• • It regularly informs about the value of security.
  • It provides investors with liquidity for their investments.
  • It entails active and continual trading.
  • It acts as a marketplace for the trading of securities.

Call markets have the potential to be quite liquid when they are called, but they are utterly illiquid in the meantime. Traders in continuous trading marketplaces, on the other hand, can plan and execute their deals at any time.