Basics of Securities Markets

A financial securities market is a venue where people and businesses can buy and sell different types of securities, including stocks, bonds, and derivatives.  A securities market is described as a financial marketplace where people and businesses can buy and sell securities including stocks, bonds, and derivatives. Primary and secondary markets are the two types of securities markets. 

 

They can be set up as electronic platforms, over-the-counter (OTC) marketplaces, or exchanges. The New York Stock Exchange (NYSE), London Stock Exchange (LSE), and Frankfurt Stock Exchange (FSE) are a few examples of securities markets.

 

What are Securities?

 

Different financial asseta that have some value and may be sold in the financial markets are called financial securities. They are typically issued by corporations or governments and are used to raise money for operating costs and business expansion.  On a secondary market, buyers and sellers frequently trade securities between themselves. These transactions are subject to a number of laws and rules intended to safeguard investors and guarantee honest and open trading. 

 

Financial assets are exposed to market risk, which means that changes in the economy, politics, and other factors may cause their value to alter abruptly and significantly. As a result, depending on how the asset performs, investors who purchase securities are exposed to the possibility of both profit and loss.

 

What Purpose Does the Securities Market Serve?

 

A venue where buyers and sellers of securities can conduct transactions to buy and sell shares, bonds, debentures, etc. is the securities market. Additionally, it plays a crucial function in helping corporations and business owners to collect money for their enterprises through public problems. The securities market is the most effective way to transfer resources from people who have them idle (investors) to those who need them (corporates).

 

Formally speaking, the securities markets offer avenues for redirecting savings towards investments and business ventures. Through a variety of financial intermediaries, "Securities" refers to a range of financial instruments that connect savings to investments.

 

What is SEBI and what does it do?

 

The Securities and Exchange Board of India (SEBI), which oversees India's financial markets, was founded on April 12, 1988. It has a significant role in controlling India's securities market. Therefore, it's crucial to understand the goal and aim of the same. According to Section 3 of the SEBI Act, 1992, the regulatory body in India is called the Securities and Exchange Board of India (SEBI). The Securities and Exchange Board of India (SEBI) was established pursuant to the SEBI Act, 1992, and is given the legal authority to: 
 

a) protect the interests of investors in securities;

b) encourage the growth of the securities market; and

c) regulate the securities market.

 

Its regulatory authority covers all intermediaries and participants in the securities market, as well as enterprises engaged in the issuance of capital and the transfer of securities. SEBI is required to carry out the aforementioned duties in the manner it sees proper. It has abilities in especially for:

 

• Regulating activity in securities markets and stock exchanges

• Registering stock brokers, sub-brokers, and other brokers, and regulating their activities.

• The encouragement of and control over self-regulatory organisations

• Prohibiting unethical and dishonest business practises

• Pontacting stock exchanges, intermediaries, self-regulatory organisations, mutual funds, and other people connected to the securities market and requesting information from them, as well as performing inspections, enquiries, audits, and inspections.

 

Role

 

This regulatory body serves as a watchdog for all parties involved in the capital demand, and its major goal is to manage an environment for financial market enthusiasts that facilitates the efficient and effective operation of the securities market. To make this happen, it makes sure that investors, financial intermediaries, and issuers of securities the three primary participants in the financial market are taken care of.

 

Issuers of securities:  Securities issuers are companies that sell securities to investors and raise capital from a variety of sources. They receive a safe and open environment for their needs thanks to this organisation.

Investors: Investors are responsible for maintaining the market's activity. 

To regain the trust of the general public who put their hard-earned money into the markets, this regulatory body is in charge of preserving an environment free from fraud.

Intermediaries in the financial sector are those who act as go-betweens for issuers and investors. They facilitate and secure financial transactions.

 

Activities of SEBI

 

SEBI performs the following duties to protect investors' and other financial stakeholders' interests. It consists of

• Investigating price rigging

• Stop insider trading

• Promote ethical behaviour

• Make an effort to attract investors

• Prohibit unethical and dishonest business practises.

 

Also Read | What is SEBI? | Structure of SEBI | Functions of SEBI | Analytics Steps

 

Types of Securities

 

Equity and debt securities are the two primary categories of securities.

 

Equity securities: These signify a company's ownership. An investor becomes a shareholder of the company when they purchase equity securities. Despite the fact that equity assets frequently pay dividends, shareholders normally aren't entitled to monthly payouts. When they sell the securities in the interim, presuming they have appreciated in value, they can earn from capital gains.

 

Debt securities: These are issued for a specific amount of time and indicate a debt obligation. In exchange for regular interest payments and the repayment of the original amount at maturity, an investor who acquires a debt security is giving money to the issuer, which could be businesses, governments, or other organisations. 

 

Participants in Securities Market

 

Individuals or organisations that take part in the buying and selling of securities are known as market participants. 

 

• These players can be divided into two groups: those who are in charge of the primary market, where securities are issued, and those in charge of the secondary market, where securities that have previously been issued are traded. 

• Investment banks, businesses, and governments are the main market participants.

• Between issuers and investors, investment banks operate as a middleman. They evaluate the underwriting risk associated with an issuer, and if they choose to accept the risk, they advertise the issuer and attempt to get the required money. 

• Without using a middleman, firms and governments can also issue securities to the general public. Participants in the secondary market include broker-dealers, institutional investors, and individual investors. 

• Securities can be purchased by retail investors directly from the issuer or through their retail brokers. Large investors like mutual funds, hedge funds, or pension funds are considered institutional investors. 

• They typically buy substantial quantities of securities either from issuers directly or on the secondary market. Companies that serve as both brokers and dealers are known as broker-dealers. They trade for their own accounts in addition to buying and selling assets on behalf of their customers. 

 

Principal Purposes of the Securities Market

 

The state and strength of the economy, as well as the investment environment, are measured by the securities markets. Here are a few of the main tasks that the securities markets carry out. 

 

• They make it possible to allocate financial resources effectively. The securities market connects investors, savers, and issuers, channelling money from individuals ready to take risks in exchange for rewards to companies that want capital to thrive. 

• Millions of small investors' diverse and dispersed funds are directed into long-term wealth development through the securities markets. Savings are thereby put to good use, enabling small investors to share in economic progress.

• The fact that the securities market makes illiquid stocks and bonds more liquid is one of its key functions. A liquid securities market is another incentive for investors and issuers to participate with more assurance. 

• The discovery of prices takes place on a key platform, the securities markets. Equities are much more difficult to price, but the securities markets are able to integrate the knowledge of analysts, traders, investors, and arbitrageurs to determine an asset's true value.

 

Primary Market

 

As previously said, firms (issuers) use the primary market to solicit new money from investors. Primary market offerings can be a public offering or a private placement programme that is made to a chosen group of investors. The shares offered may be brand-new shares that the company has just issued, or they may be part of a public offering made by promoters or major existing investors to sell off a portion of their holdings.

 

Let's define some of the terminology used in the primary market. Public issue: Securities are distributed to the general public, and anybody with the legal right to invest may take part. This security issue is primarily for ordinary investors. Some of the ways to introduce securities in the market are:

 

Initial Public Offering (IPO) - An initial public offering, often known as an IPO, is the first time common shares of a corporation are sold to the general public. An IPO's primary goal is to obtain equity cash for the company's future expansion. The minimal requirements for net tangible assets, profitability, and net worth are outlined by SEBI in its regulations as eligibility conditions for obtaining capital from public investors.

 

Additionally, SEBI laws prescribe deadlines for when securities must be issued as well as other specifications including the need to provide shares in dematerialized form and list them on a national stock market. The percentage of shares to be distributed to various groups of shareholders is also specified by SEBI rule. It states that a minimum of 35% of the shares in an eligible offer must go to retail investors (those who invest less than or equal to Rs. 2,00,000 in the issue), and a maximum of 50% of the shares may go to qualified institutional investors. 

 

The balance may be distributed to other investors. SEBI also introduced the idea of an anchor investor in 2009. A qualified institutional buyer who applies for a public issue made through the book building procedure with a value of 10 crore rupees or more is referred to as a "anchor investor." Up to 60% of the sum allotted to QIBs may be given to anchor investors. One day before the IPO, bidding for them begins.

 

Follow on Public Offer (FPO): When an already listed company makes either a fresh issue of securities. FPO stands for First Public Offering, often known as a public sale offer. A corporation raises equity capital through a new issue of capital in a follow-on public offer when it needs more money for expansion or wants to change its capital structure by retiring debt.

 

An offer for sale can also be a follow-on public offer, which typically occurs when the firm has to expand the public shareholding to satisfy legal requirements. A substantial number of shares are issued to a select group of investors in a private placement. The number of investors to whom shares are given in a private placement cannot exceed fifty, as per the Companies Act of 2013. Qualified institutional placements (QIP) or preferred allotments are two types of private placements.

 

Qualified Institutional Placements (QIPs): A QIP is a private placement of shares made by a publicly traded firm to a certain group of investors known as Qualified Institutional Buyers (QIBs). Banks, mutual funds, and other financial institutions are examples of QIBs. The requirements for corporates to be able to raise capital through QIP, as well as other terms of issuance under QIP such quantum and pricing, have been set by SEBI.

 

Also Read | Initial Public Offering (IPO): Applications and Working | Analytics Steps

 

Depository Receipts
 

A paticluar type of Securities are Depository Receipts. The shares of a foreign firm are represented by financial instruments called depository receipts (DRs). These depositary receipts are traded in the market where they were issued and are backed by local money.

 

The following steps are involved in issuing a depositary receipt:

 

(i) A company or investor gives a bank a specific number of equity shares

 

(ii) The bank deposits the security in its custodian account in the nation where the company is headquartered

 

(iii) The bank then issues a certificate (depositary receipt) to investors in the international market against those shares.
 

If the issuing corporation is the one to start the procedure and deliver the securities. It is referred to as sponsored depositary receipts and can be listed in the exchanges of the nation in which the DRs are issued if the issuing company is the one who delivers the securities and starts the process. Companies who want their DRs included should submit an application and meet all listing conditions.

 

The shares, on the other hand, are referred to as unsponsored depositary receipts if they are supplied by an investor. Unsponsored DRs are often not permitted to be traded on stock exchanges. They are exclusively tradable on OTC markets. Additionally, they are subject to less regulations. DRs may have two-way fungibility, subject to the regulatory rules of the participating nations. 

 

This implies that shares can be purchased on the local market and then changed into DRs to be traded abroad. The underlying shares that are traded on the domestic stock exchange can also be purchased and converted into DRs.

 

Conclusion

 

Securities markets are financial marketplaces for the purchase and sale of securities, including stocks, bonds, and derivatives. These markets offer a venue for businesses to raise money so they may finance their operations and expansion, as well as liquidity to investors so they can exchange securities.

 

Primary and secondary markets are the two main divisions of the securities markets. Securities are first issued by businesses and governments on the primary market. The issuer's operations are financed using the money raised from the sale of these securities. Investors trade securities on the secondary market. The trading of current securities is made easier on this market, which also gives the primary market more liquidity.