by Fylkesarkivet i Sogn og Fjordane

Financial Markets - Basics

Securities markets function in the form of "Primary security market" or "Secondary Security market"

THE PRIMARY SECURITY MARKET:

The primary market is also called as "new issue market". It is an informal forum with national and even international boundaries.

Anybody who has funds and the inclination to invest in securities would be considered a part of this market. There are different kinds of investors who prefer investing in a primary market. There are individuals, trusts, banks, mutual funds, financial institutions, pension funds and for that matter any entity can participate in such a market.

Companies can also enter into these markets with either  initial and subsequent issues of capital.

For this purpose, they have to follow the guidelines prescribed by the Controller of capital issues. Normally these guidelines are issued by them at periodical interval. Sometimes, companies are exempted from these guidelines.

A prospectus or a statement-in-lieu of prospectus is a necessary requirement because this contains all material information on the basis of which the investor would form judgment to put or not to put his money

Concealment and misrepresentation in these documents will attract serious legal implications including the annulment of the issue.

THE SECONDARY SECURITY MARKET:

Secondary markets or stock exchanges are set up under the Securities Contracts acts.

They are known as recognized stock exchanges  and operate within precincts that possess networks of communication, automatic information scans and various kinds of mechanized and computerized systems.

Normally membership cards are issued to the members against purchase of the membership cards. Normally the price of the membership card varies according to the size and seniority of the exchange.

These cards generally command high unofficial premia because the number of members is not easily expandable.

Business is transacted in these exchanges within the stipulated official working hours. The transaction takes place on the trading floor under open bid system. Methods of recording and settlement are laid down by means of guidelines and these guidelines are made available to the members and the members are obliged to follow these guidelines during the course of transaction in securities without fail

Most active scripts are traded with mechanism to use the clearing house for the settlement of cross deals

Normally the volume of business transacted at the floors is often too inadequate and consequently, enormous deals take place outside the floors and during off-business hours. These transactions are known as "kerb" deals.

The regulatory mechanism of the stock exchanges in each country is done by a separate machinery and they are called as securities and exchanges boards. These machineries are responsible for monitoring and controlling the stock market operations, new capital issues, working of mutual funds and merchant banking subsidiaries of banks.