Introduction to the Securities Market: formula sheet

Key formulas

Primary vs secondary market test

Issuer receives the money → primary market; investor receives the money → secondary market

Use this to classify any transaction in seconds.

Core job of each participant

Exchange = platform; Broker = access; Clearing corporation = settlement guarantee; Depository = holds securities; Regulator = rules and oversight

Most matching questions come from these five one-line roles.

Trade flow

Order → Exchange matching → Clearing corporation obligations → Pay-in/pay-out of funds and securities via banks and depositories

Remember the order. Trap options swap the steps.

Equity vs debt claim

Equity = ownership (residual claim); Debt = creditor (fixed claim)

On liquidation, creditors are paid before preference shareholders, who are paid before equity holders.

Money market limit

Money market = original maturity ≤ 1 year

Instruments longer than one year belong to the capital (debt) market.

Mutual fund NAV

NAV per unit = (Market value of assets − Liabilities) ÷ Number of units outstanding

Units are bought and sold at NAV-based prices, not at market-driven prices as with shares.

Treasury bill pricing

Price = Face value ÷ (1 + yield × days ÷ 365)

T-bills are issued at a discount and redeemed at face value. They carry no coupon.

Futures vs options

Futures: obligation for both parties; Options: right for buyer, obligation for seller

Option buyer pays a premium and can let the option lapse. Option seller (writer) receives the premium.

Call and put

Call = right to buy; Put = right to sell

Both are at an agreed strike price on or before expiry.

SEBI Act, 1992

Protect investors + promote development + regulate the securities market

Gave SEBI statutory powers. SEBI was originally set up in 1988 as an administrative body.

SEBI's three powers

Quasi-legislative + quasi-judicial + quasi-executive

Regulations, orders after hearing, and inspection/investigation/enforcement respectively.

SCRA, 1956

Recognition of exchanges + listing + regulation of contracts in securities

Only a recognised stock exchange can operate. Think of it as the law for trading and exchanges.

Depositories Act, 1996

Dematerialisation + electronic holding and transfer of securities

Governs depositories (NSDL, CDSL) and their participants.

RBI's securities-related domain

Banks + money market + government securities + forex

Not the regulator of equity and corporate bond intermediaries. That is SEBI.

Exchange role

Self-regulatory organisation for its members, under SEBI oversight

Frames rules, monitors, inspects and disciplines trading members.

Stock exchange function

Stock exchange = trading platform + rules + surveillance

It matches orders. It does not guarantee settlement or hold securities.

Clearing corporation function

Clearing corporation = obligation determination + netting + novation + settlement guarantee + margining

Novation means the clearing corporation becomes the buyer to every seller and the seller to every buyer.

Depository function

Depository = demat holding + book-entry transfer, through depository participants

Investors deal with a DP, not the depository. NSDL and CDSL are the two depositories.

Trading member vs clearing member

Trading member = right to trade; Clearing member = right to clear and settle

A trading member that is not a clearing member settles through a clearing member.

Order of the trade life cycle

Trade (exchange) → Clearing (clearing corporation) → Settlement of funds (clearing bank) and securities (depository)

Use this order to place any entity in the right stage.

Rolling settlement cycle

Settlement day = T + 1 working day

T is the trade day. Holidays are not counted, so a Friday trade normally settles on Monday.

Trade life cycle order

Order → Matching → Trade confirmation → Clearing → Settlement (pay-in, then pay-out)

Exam options often shuffle this order. Pay-in always comes before pay-out.

Net obligation

Net obligation = Total buys − Total sells (per security, per member)

A positive result means the member must receive the securities. A negative result means the member must deliver them. Funds are netted in the same way.

Who does what

Exchange = matching | Clearing corporation = clearing and guarantee | Depository = securities movement | Clearing bank = funds movement

Use this one-line map to eliminate wrong options on roles.

Quick revision

• Primary market is where securities are issued for the first time; secondary market is where existing securities are traded.
• Know each participant by role: issuers, investors, intermediaries and regulators.
• Equity represents ownership; debt represents a borrowing that the issuer must repay.
• SEBI is the main regulator of the securities market in India.
• An exchange provides the platform for trading; a clearing corporation handles clearing and settlement guarantees.
• A depository holds securities in electronic form; depository participants are its agents for investors.
• Brokers deal on behalf of clients; keep their role separate from that of the exchange.
• Infrastructure institutions support trading, clearing, settlement and holding of securities.
• A trade goes through order, execution, clearing and settlement in that sequence.
• Settlement means the exchange of securities and funds between buyer and seller.
• Read each question for the exact role or regulator asked about before choosing an option.

Common mistakes

• Treating an exchange trade as a primary market transaction. Fix: Check who receives the money. In normal exchange trading, the seller investor gets it, not the issuer.
• Saying the stock exchange settles trades and guarantees them. Fix: Exchange matches orders. The clearing corporation determines obligations and guarantees settlement.
• Saying debenture holders are owners of the company. Fix: Debenture and bond holders are creditors. Only shareholders are owners.
• Treating all debt instruments as money market instruments. Fix: Money market instruments have original maturity up to one year. Longer debt is capital market debt.
• Saying RBI regulates stock brokers and mutual funds. Fix: Brokers, mutual funds and depositories are regulated by SEBI. RBI covers banks, money market, government securities and forex.
• Confusing SCRA with the SEBI Act. Fix: SEBI Act creates and empowers SEBI. SCRA governs exchange recognition, listing and contracts in securities.
• Saying the stock exchange guarantees settlement of trades. Fix: Link guarantee and novation to the clearing corporation. The exchange only provides the platform and rules.
• Saying investors open an account directly with NSDL or CDSL. Fix: Remember the chain: investor → DP → depository. The DP is the agent of the depository.
• Treating clearing and settlement as the same thing. Fix: Clearing is working out and confirming obligations. Settlement is the actual transfer of funds and securities.
• Counting weekends or holidays in T+1. Fix: Count working days only. A Friday trade settles on Monday unless Monday is a holiday.

Exam tips

• Practise one-line role matching until it is automatic. Many questions are direct matches.
• Under negative marking, skip a question only if you cannot narrow to two options. Wrong answers cost a percentage of that question's marks.
• Beware 'directly', 'only' and 'always' in options on participants.
• Read for the segment first. Many wrong options describe a correct role in the wrong segment.
• Revise the trade flow order, since sequence questions swap clearing, settlement and depository steps.
• Expect direct-definition questions. Learn one line for each instrument covering holder position, return and maturity.
• Watch the words obligation and right. They separate futures from options and the option buyer from the seller.
• Remember the liquidation order: creditors, then preference shareholders, then equity shareholders.