Securities market
The market in which securities are issued, purchased by investors and subsequently transferred among investors — the regulated channel that moves household savings to businesses.
In plain language
A household has savings. A business needs capital. The securities market is the arrangement that connects the two.
The business issues securities and raises money through a regulated contract. It lists the securities on a stock exchange so they are liquid — they can be sold when needed. And it provides information about its activities and financial performance. In the workbook's words, this enables the flow of capital from households to business in a regulated, institutionalised framework.
The workbook's definition is compact: the market in which securities are issued, purchased by investors and subsequently transferred among investors is called the securities market. Three verbs — issued, purchased, transferred — and they map onto the market's two halves.
How it works
Two interdependent and inseparable segments (Chapter 2, section 2.2).
| Segment | What happens | Who deals with whom |
|---|---|---|
| Primary market | Issuers raise fresh capital — public issues (IPO, FPO), rights issues, private placements, preferential issues, QIPs | Issuer directly with investors |
| Secondary market | Already-issued securities are traded | Investors only |
An active secondary market promotes the growth of the primary market and capital formation, because primary-market investors are assured of a continuous market in which to exit.
Two ways to trade in the secondary market.
- Over-the-counter (OTC): trades directly negotiated and settled between counterparties.
- Exchange traded: trading and settlement through the exchange, with a clearing corporation acting as counterparty and guaranteeing settlement to both buyers and sellers through novation — buyer to every seller, seller to every buyer.
Risk management. Because it guarantees settlement, the clearing corporation charges margins, most prominently initial margin (based on "Value at Risk") and mark to market margin.
Participants (section 2.3). Market infrastructure institutions and intermediaries (stock exchanges such as NSE, BSE and MSEI; clearing corporations; the two depositories CDSL and NSDL; depository participants; brokers; authorised persons; custodians; clearing banks; merchant bankers), institutional investors and retail investors.
Its primary function: to enable the flow of capital from those who have it to those who need it.
A worked example
Illustrative company, prices and amounts.
A Coimbatore pump manufacturer needs ₹200 crore to build a new plant.
| Step | Market | What happens |
|---|---|---|
| 1 | Primary | It makes an IPO. Lakshmi, a retail investor, applies for shares worth ₹1,50,000 and is allotted them. Her money goes to the company |
| 2 | Listing | The shares list on the exchanges, so Lakshmi's holding becomes liquid |
| 3 | Secondary | Two years later Lakshmi sells her shares for ₹2,10,000 to a mutual fund through her broker. The money goes to Lakshmi, not the company |
| 4 | Settlement | The clearing corporation stands between Lakshmi and the fund, guaranteeing that she gets paid and they get the shares |
| 5 | Custody | The shares move between demat accounts held with depositories through DPs |
The company raised capital once, in step 1. Step 3 raised nothing for it — but without the confidence that step 3 would be possible, Lakshmi might never have applied in step 1. That is the "interdependent and inseparable" link.
Why NISM asks about it
The definition and structure are in Chapter 2 (Introduction to Securities Markets), sections 2.1 to 2.3, and the chapter's sample questions ask about the function of secondary markets and types of issues. Chapter 1 frames why the market exists (saving versus investment), and Chapter 12's PFUTP Regulations protect its integrity against fraudulent and unfair trade practices. A PMS portfolio is built almost entirely from securities bought in this market.
Common exam traps
- Secondary market transactions do not raise money for the company. Dealings are between investors only.
- Primary and secondary markets are interdependent, not competing.
- An Offer for Sale is a secondary-market transaction done through the primary-market route — proceeds go to the selling shareholders, not the company.
- OTC trades are not guaranteed by a clearing corporation; exchange trades are, through novation.
- Private placement under the Companies Act 2013 is an offer to less than 200 persons.
- India has two depositories registered with SEBI: CDSL and NSDL.
Where this is taught
- Series XXI-B · Chapter 2: Introduction to Securities Marketsintroduced here
- Series XIX-E · Chapter 1: Investments Landscapeintroduced here
- Series XXI-A · Chapter 2: Introduction to Securities Marketsintroduced here
Related terms
- NovationThe clearing corporation stepping into the middle of every trade — becoming the buyer to every seller and the seller to every buyer — so that neither side carries the other's default risk.
- Clearing corporationThe entity that steps between every buyer and seller in the derivatives segment by novation, becoming the counterparty to both sides and guaranteeing that the trade settles.
- DepositoryAn institution that holds investors' securities in electronic form and provides the services needed to transact in them — the securities equivalent of a bank holding money rather than cash.
- Initial Public OfferThe first offer of a company's shares to the public — by fresh issue, by existing shareholders selling through an offer for sale, or both — after which the shares must be listed.
- Primary marketThe market where an issuer sells securities to investors for the first time and receives the money itself — the "new issue market", as against the secondary market where investors trade among themselves.
- Secondary marketThe market where securities already issued are traded between investors — the money goes to the selling investor, not to the company, and the issuer's capital is unchanged.
- SecuritiesFinancial instruments — shares, bonds, derivatives, mutual fund units, government securities and more — issued to raise funds, as defined in Section 2(h) of the Securities Contracts (Regulation) Act, 1956.
- Proprietary tradeA trade a stockbroker executes for its own account with its own funds, not on behalf of a client — distinct from the client orders it routes through its exchange terminal.
- Financial disintermediationThe shift of borrowing away from banks and towards the securities markets, where a company raises money directly from investors by issuing paper instead of taking a bank loan.