Secondary market

Topic: Financial Markets, Instruments, Insurance and Pensions · NCERT: Beyond NCERT

Meaning

The secondary market is the market where investors buy and sell securities that already exist (shares, bonds and others) among themselves, mostly on stock exchanges. The company that first issued them gets no money from these trades.

It matters because it does two jobs:

• Liquidity: an investor can turn shares into cash quickly.
• Price discovery: buyers and sellers together set a fair price every moment.

People buy new shares in the primary market more readily when they know they can sell them later in the secondary market.

Explanation

How it works

• The basic difference:
• In the primary market, a company sells new shares (for example, in an IPO, the first sale of its shares to the public) and gets the money.

• In the secondary market, money moves from one investor to another. The company gets nothing directly.

• The system behind every trade:

• Stock exchange (BSE, NSE): the place where buy and sell orders are matched.
• Depository (NSDL, CDSL): holds shares electronically. It transfers ownership by book entry (a change in its computer records), so no paper moves.
• Depository participant (DP): the depository's agent that deals with investors. DPs are usually brokers or banks.
• Demat account: holds shares in electronic form, much like a bank account holds money. It ended the problem of forged, lost or stolen paper certificates.

• Clearing corporation: works out who owes what (clearing) and then moves the shares and money (settlement).

• Novation (the clearing corporation's safety role):

• The clearing corporation becomes the buyer to every seller and the seller to every buyer.
• So if one side fails to pay or deliver, the other side still gets paid.
• This removes counterparty risk (the risk that the other party in a deal does not keep its side).

• A Settlement Guarantee Fund (SGF) backs it and covers any shortfall when a member defaults.

• Settlement cycle = the time between a trade and the final exchange of shares and money. "T" is the trade day. T+1 means shares and money change hands one business day after the trade.

What moves prices in the secondary market

• Company performance: a good outlook raises the share price. A bad product, a workers' strike or a big loss lowers it.
• Government policy: new laws and tax rules change expected profits, so prices move.
• Shocks: wars, pandemics, political instability and sudden policy changes make investors fearful. They sell, and prices fall.
• Stock market boom = the shares of many companies rise together.
• Stock market crash = the shares of many companies fall steeply at the same time, usually because of panic selling.
• Bull market = a long rise in prices, with optimism. Bear market = a long fall, commonly 20% or more from a peak.

Measuring the market: indices and valuation

• Stock market index = one number that tracks the prices of a chosen group of shares. It works like a thermometer for the market.

• Index = (current free-float market cap of the index stocks ÷ base-period free-float market cap) × base value

• Market capitalisation (market cap) = share price × number of shares outstanding.

• Free float = shares actually available for trading. It leaves out shares held by promoters (the company's founders or controlling owners) and shares that are locked in.
• Worked example:
• Share price ₹500 × 10 crore shares = market cap of ₹5,000 crore.
• Promoters hold 60%, so the free float is 40%. Free-float market cap = 0.40 × ₹5,000 crore = ₹2,000 crore.
• Earnings per share (EPS) = ₹25. P/E ratio = 500 ÷ 25 = 20, so investors pay ₹20 for every ₹1 of yearly profit.

• Index: base-period market cap ₹1,000 crore, base value 100. If today's free-float market cap is ₹8,00,000 crore, then index = (8,00,000 ÷ 1,000) × 100 = 80,000.

• Market cap-to-GDP ratio ("Buffett indicator") = total market cap ÷ GDP × 100. A very high ratio can mean the market is over-valued. A very low one can mean it is under-valued.

• India VIX = expected near-term volatility (how much prices may swing), calculated from Nifty option prices. It is called the "fear gauge". It usually moves opposite to the Nifty.

Safety valves: circuit breakers

• Circuit breaker = an automatic halt in trading when prices move beyond set limits. It gives investors time to think and stops panic from spreading.
• Market-wide circuit breaker: triggered by a move of 10%, 15% or 20%, up or down, in the Sensex or the Nifty 50, whichever crosses the limit first [5][6].
• A 10% move before 1 PM halts trading for 1 hour. A 15% move before 1 PM halts it for 2 hours. A 20% move at any time halts it for the rest of the day.
• The limits are turned into index points every quarter, based on the previous quarter's closing level [5].

• Example: if the Nifty closed the last quarter at 25,000, the 10% trigger is 2,500 points and the 20% trigger is 5,000 points.

• Stock-level price bands: each stock has a daily limit of 2%, 5%, 10% or 20%. It cannot trade outside its band that day.

In India

• Exchanges and indices:
• BSE (1875) is Asia's oldest stock exchange. Its Sensex has 30 stocks, with base 1978-79 = 100. It has been weighted by free-float market cap since 2003.

• NSE's Nifty 50 has 50 stocks, with base 3 November 1995 = 1000. It is also weighted by free-float market cap.

• Depositories: NSDL (1996) and CDSL (1999) work under the Depositories Act, 1996.

• Clearing corporations: NSE Clearing Ltd (for NSE) and ICCL (Indian Clearing Corporation Ltd, for BSE).
• Regulator: SEBI got statutory powers (powers given by law) under the SEBI Act, 1992, after the Harshad Mehta scam.
• Settlement reforms:
• Before 2001, trades were settled weekly, with badla (pushing payment or delivery to the next week). This encouraged heavy speculation.
• After the Ketan Parekh scam, badla ended and rolling settlement began (2001: T+5). Rolling settlement means each day's trades are settled separately, a fixed number of days later.
• The cycle moved to T+2 in 2003. SEBI allowed T+1 on an optional basis in September 2021 [4]. T+1 was phased in stock by stock and completed on 27 January 2023.
• Optional T+0 (beta), or same-day settlement, was notified on 21 March 2024 for 25 scrips and a limited number of brokers. It runs alongside T+1 and does not replace it [1].
• In December 2024, optional T+0 was widened to cover up to the top 500 scrips by market capitalisation [2]. Stocks were added in steps of 100 a month [3].

• In October 2025, SEBI gave Qualified Stock Brokers (large brokers) more time to set up T+0 systems [10].

• Algorithmic trading (computer programs placing orders automatically):

• SEBI issued broad guidelines in May 2013 [11].

• SEBI issued a retail algo framework on 4 February 2025 [12]. Its timeline was extended in April 2025 [13] and again in September 2025 [14].

• Participation:

• Demat accounts stood at 7.38 crore in October 2021 [7].
• They grew from 11.45 crore in FY23 to 15.14 crore in FY24 [8].

• They crossed 21.6 crore in FY26 (till December 2025) [9].

• Size of the market:

• The BSE market cap-to-GDP ratio was 136% at the end of December 2024, against China (65%) and Brazil (37%). India ranked fifth in the world [8].

• India's capital markets grew from 144% of GDP (CY2017) to 175% (CY2024) [9].

• Key episodes:

• The market-wide circuit breaker was triggered in the COVID crash of March 2020.
• Indices reached record highs in 2024, helped by retail and domestic investors.

Don't confuse with

• Primary market: the company issues new securities and gets the money. In the secondary market, existing securities change hands and the company gets no fresh capital.
• Depository vs depository participant (DP): NSDL and CDSL are the depositories. DPs (brokers or banks) are only their agents who deal with investors.
• Market cap vs free-float market cap: market cap counts all shares. Free-float market cap counts only tradable shares, and the Sensex and Nifty 50 use free float.
• Bear market vs correction: a bear market is commonly a fall of 20% or more from a peak. A fall of about 10% is usually called a "correction".

Prelims Hooks

• Secondary-market trades do not raise fresh capital for the company. They only provide liquidity and price discovery.
• Novation: the clearing corporation becomes the buyer to every seller and the seller to every buyer. It is backed by the Settlement Guarantee Fund.
• T+1 completed on 27 January 2023. Optional T+0 (beta) was notified on 21 March 2024 for 25 scrips, alongside T+1 [1].
• Market-wide circuit breaker: 10%, 15% or 20% on the Sensex or the Nifty 50, whichever is breached first. A 20% move halts trading for the rest of the day [5][6].
• Sensex: base 1978-79 = 100, 30 stocks. Nifty 50: base 3 November 1995 = 1000, 50 stocks. Both are weighted by free-float market cap.
• India VIX is calculated from Nifty option prices, not from share prices. SEBI size bands: large-cap = top 100, mid-cap = 101-250, small-cap = 251 onwards.

Mains Points

• Faster settlement vs market readiness:
• T+1 and T+0 shorten the time in which a default can happen and return investors' money faster.
• But custodians and foreign investors in other time zones get less time to arrange funds.

• That is why T+0 is optional and phased in [1][2].

• Financialisation of household savings (more household savings going into shares and funds instead of gold or property):

• Demat accounts rose from 7.38 crore (October 2021) to more than 21.6 crore (FY26) [7][9]. This deepens the market and supports investment.

• But it exposes first-time investors to losses. This raises the need for financial literacy and SEBI's investor-protection work.

• Technology, fairness and valuation risk:

• Algorithmic trading adds liquidity. But the NSE co-location case showed that speed can become an unfair edge: some brokers got early access to price data. SEBI's 2025 retail algo framework aims to make retail algo trading safer and traceable [12].
• A market cap-to-GDP ratio of 136% (December 2024) [8] and high P/E ratios can signal over-valuation.
• Circuit breakers, price bands and the VIX act as safety valves. The 1992 and 2001 scams show that regulation must keep ahead of new market practices.

Related concepts

• Depository
• Demat account
• Clearing corporation
• T+1 settlement
• Algorithmic trading
• Circuit breaker
• Sensex
• Nifty 50
• Market capitalisation
• Free float

Read more

• Secondary market: trading infrastructure, indices and valuation