The Capital Market has a wide array of options within it. It is not just about buying and selling shares from the secondary market. There are many other strategies and different markets to invest in. For example, you have the Initial Public Offer (IPO) or primary market, the derivatives segment, and now the latest Small-Medium Enterprises (SME) Exchange.
For savvy investors looking for newer, more profitable options, the SME exchange can be a great platform.
What are SMEs?
Companies first list their shares on the Exchange in the primary market through an Initial Public Offer (IPO). This includes firms of all sizes-small, medium, and large. However, small and medium enterprises have a greater scope of risk than larger companies. Investors need a high degree of stock market knowledge to sift through these companies and find companies that matched their risk appetite. This is not possible for every investor. As a result, many small investors can make losses. To prevent this, both NSE and BSE created separate exchanges in India catering only to small and medium-sized firms. The BSE calls it 'SME Exchange', while NSE’s is called ‘Emerge.’
Why should you trade in SMEs?
There are so many small and medium-sized companies (known as smallcap and midcap stocks) listed on the regular stock market. It is difficult for an interested investor to sift through them to identify value-making companies. This is not the case with an SME Exchange. It is a niche segment for small and medium enterprises, which have the potential to give higher returns. Moreover, the exchanges have entry restrictions like positive net worth and cash flows for two years before listing. Also, companies, which had once applied for winding up or restructuring, are not allowed to list on the Exchange. These restrictions help insulate investors from additional risk.
How do you trade in SMEs?
Trading on the SME Exchanges is almost like the normal buy and sell procedure. It does not require any extra procedures. However, some trading rules differ. For one, the SME Exchange has a larger-than-normal lot size – the minimum number of shares you can buy or sell in each transaction. You cannot trade amounts lower than ₹1 lakh. Also, the lot size varies with the price of the stocks. For example, on the NSE Emerge, if the stock price is lower than ₹14, then the lot size is 10,000. However, if the stock price is between ₹120 and ₹150, then the lot size falls to 1,000.
Other trading guidelines
These stocks are traded in the 'Cash' (Equity) segment. They can be bought and sold either in the continuous market or specifically in the call auction market. Just like the normal cash segment, these shares fall into different series like the ‘rolling settlement,’ ‘block trading window,’ ‘ odd lot trading,’ and so on. Moreover, you can place both markets and limit orders just like a normal trade. These can be modified and cancelled until processed. Once settled, the shares will be delivered in T+1 day.
Liquidity
Some care should be taken while trading on the SME Exchanges in India. Firstly, investors should know that the risk factor is quite high while investing in small and medium-sized companies. Yes, they are capable of giving really great returns, but they also have a higher than average probability of turning bust. Ensure you get your research correct. Also, liquidity is lower on SME exchanges. Unlike the regular exchange, your order may not find a matching buyer/seller immediately. In such a case, the Exchange may also cancel orders, especially in the call auction market.