Project on Investment in Securities Market
Financial Planing
(Source: SEBI Website - Securities Market Awareness Campaign
Empowering Investors Through Education)

How to transact in securities?
Secondary Market

Secondary market enables you to adjust your holdings of securities in response to changes in your assessment about risk and return by selling or buying your securities. It enables you to sell securities for cash to meet your liquidity needs. It essentially comprises of the stock exchanges which provide a platform for trading of securities. The securities are traded, cleared and settled as per a detailed well-settled regulatory framework under the supervision of the Exchanges and oversight of SEBI. You can access the trading platform of an exchange only through a registered broker.

Stock exchange lists securities and provides you an opportunity to trade in the listed securities. It ensures certain compliances and disclosures from companies in your interest. It guarantees settlement of trades executed on your behalf and provides you protection if your broker becomes a defaulter.

Any trade in securities outside stock exchanges other than spot transactions are not backed by regulatory framework of exchanges or SEBI. Hence you do not get any protection if you trade outside an exchange. Besides, the stock exchange offers a ready market for your securities. If you are trading outside an exchange, you have to waste considerable time to find out the right person who is willing to undertake a corresponding transaction with you. Other benefits of trading on an exchange include: you do not take counterparty risk, which is assumed by a clearing corporation, you have access to the investor grievance redressal mechanism of stock exchanges.

The brokers/sub-brokers are your link to the stock exchange. They are intermediaries in the market subject to the regulatory discipline of SEBI/the concerned stock exchange. They enter into transactions in securities on your behalf. Your relation with them is governed by the terms set out in the client-broker/client-sub-broker agreement. If you are buying and selling securities actively, it is advisable that you open a depository account to receive and deliver demat securities. It is in your interest that you have depository account to get immediate credit for purchase of securities, and avoid all the ills of physical certificates.

The broker/sub-broker must be registered with SEBI/ the concerned stock exchange, which you should verify from the registration certificate displayed at his office. The list of such authorised brokers/sub-brokers is available with the respective exchanges. He should have the infrastructure to transact your business with speed and accuracy. Besides, you should also look for your convenience such as location, cost and quality of service, etc.

There are a number of sources where you can get information about the company. In terms of listing agreement, the companies are required to make continuous disclosures about price sensitive information. These disclosures are disseminated through the web sites of the exchanges. Besides, SEBI provides EDIFAR (Electronic Data Information Filing And Retrieval system), which is an automated system for filing, retrieval and dissemination of time sensitive corporate information. The EDIFAR contains information about (i) financial statements comprising of balance sheets, profit and loss account and full version of the annual report, half yearly financial statements including cash flow statements and quarterly financial statements, (ii) corporate governance reports, (iii) shareholding pattern and (iv) action taken against the company by a regulatory body. EDIFAR is available at http://sebiedifar.nic.in. Apart from the above, the details of a company are also available with your intermediary and numerous public online sites.

You should not buy securities on impulse, a hot tip or follow the herd. You should discriminate between information, casting away irrelevant and illogical pieces of information, and checking for opportunities and facts before buying a security. You should examine the fundamentals of a security before taking a decision to invest.

At the start of your relationship with a broker/sub-broker, you should sign the client-broker/client-sub-broker agreement indicating your relations with him and retain a copy with you. You should receive from the broker a contract note indicating your transactions upon execution of your trades. You should also obtain receipt of all monies paid to the broker. Regulations require that you receive the contract note indicating details like Order Number, trade Number, Time, Price, Brokerage, etc within 24 hours of trade. In case you have any doubt about the details contained in the contract note with respect to order number, trade number, price, etc. you must avail of the facility now provided to the investors by the major stock exchanges (NSE and BSE) to verify their trades on the respective websites. It is desirable to avail of this facility in respect of a few trades on random basis even when there is no doubt. The exchanges generate and maintain an audit trail of orders/trades for a number of years and you can counter check details of your order/trade with the exchanges.

Contract note is confirmation of trades done on a particular day on your behalf. It establishes a legally enforceable relationship between you and the broker in respect of settlement of the trades. It helps to settle disputes/claims/differences. It is a prerequisite for filing a complaint or arbitration proceeding against the broker. A valid contract note should be in the prescribed form, be signed by the authorized signatory and contain the details of trades.

It is advisable to make payment by way of account payee cheque in the name of the broker/sub-broker only. A proper receipt should be collected from the intermediary. You should receive payment for securities within 48 hours of declaration of pay-out by the respective stock exchange.

You should deliver securities before the pay-in is due and you should receive securities for which you have made payment, within 48 hours of the securities pay-out by the respective exchange.

The regulations do not mandate any requirement for the investor to keep a deposit with the broker. It depends on your understanding with the broker/sub-broker. You are, however, required to pay upfront margin to the broker before the trade is executed. Exchanges generally prescribe higher levels of margins to be collected from clients as upfront depending on the liquidity of the security.

The exchanges maintain an Investor Protection Fund to make good investor claims, which may arise out of non settlement of obligations by the trading member, who has been declared a defaulter, in respect of trades executed on the Exchange.

You should bring it to the notice of the broker with whom the sub-broker is affiliated. In case the sub-broker/broker fails to resolve the dispute and in case of complaints against a broker/company, you should take up the matter with Investor Grievance Cell of the concerned exchange. The Cell takes up complaints for redressal in respect of trades executed on the exchange or trades pertaining to companies traded on the exchange. You should lodge the complaints in the prescribed form with all associated documents such as contract note.