Secondary Markets is one of four 20-mark chapters in NISM Series XII. It covers what happens after a security is listed — how it trades, how it settles, and what the investor is entitled to along the way.
Primary against secondary, once more
The distinction is the foundation and it is asked directly:
- Primary market — securities are issued for the first time and the money reaches the issuer.
- Secondary market — those securities change hands between investors, and the company receives nothing.
The players
Stock exchanges provide the platform and the order book. Trading members (brokers) are the registered intermediaries through whom investors access it. Clearing corporations guarantee settlement. Depositories hold securities electronically, reached through a depository participant.
Keep those last two apart, because they are routinely confused: the depository holds and transfers by book entry; the clearing corporation guarantees.
The Unique Client Code
Every client must be allotted a UCC, tagged to their trades so the exchange can trace each transaction to the actual investor.
That traceability is why post-trade client code modification is tightly restricted. Without limits, a member could assign winning trades to one client and losing ones to another. Modifications are permitted only for genuine errors, within narrow bounds, and with reporting.
Order types and matching
A market order prioritises certainty of execution over price — it fills immediately at whatever is available. A limit order prioritises price over certainty — it rests in the book until it can be filled at the specified price or better, and may never fill at all.
Orders match on price priority, then time priority: the better price executes first, and among equal prices the earlier order wins. That rule is what makes the order book fair and transparent.
A stop-loss order sits inactive until the market reaches its trigger price, then enters the book. It limits how far a position can run against you, though in a fast market the fill can be worse than the trigger.
Impact cost
Impact cost is the cost you incur executing a trade because of the liquidity on that counter — the price moves against you as you fill.
The relationship, and the exam loves testing it backwards: more liquidity means lower impact cost. A counter with many buyers and sellers is cheap to trade; a thin one is expensive. Investors therefore prefer stocks with lower impact cost, which is the opposite of what a careless reading of the sentence suggests.
Settlement
Under T+1 rolling settlement, obligations from today's trades are settled on the next trading day, with each day's trades settled separately. Shorter cycles reduce the window over which counterparty risk accumulates.
Securities move by book entry through the depository; funds move through the clearing process. Neither involves paper.
Circuit breakers and price bands
Market-wide circuit breakers halt trading across the market when a benchmark index moves beyond specified thresholds, giving participants time to absorb information rather than trade on panic. Individual scrips have their own price bands.
What an investor is entitled to — and owes
This comes up repeatedly, often as an "all of the above" question, and it runs both ways.
Rights include: a Unique Client Code; a contract note for every trade, showing the rate and all charges levied; best execution on price; a statement of accounts and settlement of the account on request; knowledge of the charges levied; copies of the KYC and other documents executed; the ability to file arbitration against a member in a dispute; and to complain to the exchange about the member.
Obligations include: paying funds and delivering securities in time for settlement; verifying the bank and demat account to confirm money and securities moved as expected; and checking the details of trades against the contract note.
The contract note is the single most important document here — it is the primary legal record of a transaction, and checking it is the investor's main safeguard against unauthorised or wrongly priced trades.
Study note
Much of this chapter appears as True/False or "which of the following" questions that hinge on one word. Read each twice. And with no negative marking in Series XII, answer every one.
Practise all 55 Secondary Markets questions free at secondary markets, then take a full-length timed mock.