Primary Market & Secondary Market
What is Primary Market?
Primary Market – The primary market is also known as the new issues market.It deals with new securities being issued for the first time. The essential function of a primary market is to facilitate the transfer of investible funds from savers to entrepreneurs seeking to establish new enterprises or to expand existing ones through the issue of securities for the first time.
The investors in this market are banks, financial institutions, insurance companies, mutual funds and individuals. A company can raise capital through the primary market in the following forms-
- Equity shares,
- Preference shares,
- Debentures,
- Loans and deposits.
Funds raised may be for setting up new projects, expansion, diversification, modernisation of existing projects, mergers and takeovers etc.
Characteristics of Primary Market
Primary capital markets are those security market where the equity and debt securities of corporations are offered to the investors for the first time. Important features of primary market are the following.
- Primary market is the market for new long term capital.
- In a primary market, the securities are issued for the first time by the company to investors.
- In primary market securities are issued b the company directly to the investors.
- In primary market the company receives the money and issues new security certificates to the investors.
- In primary market it is difficult to accurately gauge the investor demand for a new security until several days of trading have occurred.
- Primary market does not include certain other sources of new long-term external finance, such as loans from commercial banks and other financial institutions.
- Primary issues are used by companies for setting up new business for expanding or modernizing the existing business or for providing permanent working capital.
Sources of Raising Capital in the Primary Market
| Offer through Prospectus | Offer through prospectus is the most popular method of raising funds by public companies in the primary market.This involves inviting subscription from the public through issue of prospectus. A prospectus makes a direct appeal to investors to raise capital, through an advertisement in newspapers and magazines. The issues may be underwritten and also are required to be listed on at least one stock exchange. The contents of the prospectus have to be in accordance with the provisions of the Companies Act and SEBI disclosure and investor protection guidelines. |
| Offer For Sale (OFS) | Under this method securities are not issued directly to the public but are offered for sale through intermediaries like issuing houses or stock brokers. In this case, a company sells securities enbloc at an agreed price to brokers who, in turn, resell them to the investing public. |
| Private Placement | Private placement is the allotment of securities by a company to institutional investors and some selected individuals. It helps to raise capital more quickly than a public issue. Access to the primary market can be expensive on account of various mandatory and nonmandatory expenses. Some companies, therefore, cannot afford a public issue and choose to use private placement. |
| Right Issue | This is a privilege given to existing shareholders to subscribe to a new issue of shares according to the terms and conditions of the company. The shareholders are offered the ‘right’ to buy new shares in proportion to the number of shares they already possess. |
| e-IPOs | A company proposing to issue capital to the public through the on-line system of the stock exchange has to enter into an agreement with the stock exchange. This is called an Initial Public Offer (IPO). SEBI registered brokers have to be appointed for the purpose of accepting applications and placing orders with the company.The issuer company should also appoint a registrar to the issue having electronic connectivity with the exchange. |
What is a Secondary Market?
The secondary market is also known as the stock market or stock exchange. It is a market for the purchase and sale of existing securities. It helps existing investors to disinvest and fresh investors to enter the market. It also provides liquidity and marketability to existing securities. It also contributes to economic growth by channelizing funds towards the most productive investments through the process of disinvestment and reinvestment. Securities are traded, cleared, and settled within the regulatory framework prescribed by SEBI.
Types of Secondary Market
- India International Exchange
- Ace derivatives and commodity exchange limited
- Ahmedabad stock exchange
- BSE Ltd
- Calcutta stock exchange
- Hapur commodity exchange Ltd
- India pepper and spice trade association, Kochi
- Indian commodity exchange Ltd, New Delhi
- Magadh stock exchange Ltd
- Metropolitan stock exchange of India Ltd
- Multi Commodity Exchange of India Ltd (MCX)
- National Commodity and Derivatives Exchange
- National Multi Commodity Exchange of India Limited, Ahmedabad
- National Stock Exchange of India Ltd.
- Rajkot Commodity Exchange Ltd., Rajkot
- Spices and Oilseeds Exchange Ltd., Sangli
- Universal Commodity Exchange Ltd., Navi Mumbai
Functions of Secondary Market
- It’s a continuous market for securities-You can trade in shares without risk and enjoy continuous opportunities for trading.
- You can evaluate securities: The prices of shares give a clear idea on the performance of Companies.
- You can mobilize savings: Public savings are mobilized through mutual funds, REITs among others. Ordinary citizens get an opportunity to invest small amounts in mutual funds.
- Stock markets encourage healthy speculation: Stock markets offer opportunities for healthy speculation and the chance to reap high profits in the markets.
- Easy movement of funds: Stock exchanges like BSE and NSE help investors and Companies sell/buy shares.
- BSE and NSE protect investors: SEBI regulates stock exchanges and protects the interests of investors.
- Secondary market offers liquidity: Banks invest idle money in the secondary market and earn quick profits in a short time.
- Secondary markets are an economic barometer: You get an idea on the economic conditions of the Nation based on the stock markets.
- Secondary market regulates Companies: Stock markets force Companies to follow rules and regulations. It regulates the management of Companies.
- Stock markets attract foreign capital: The stock markets attract foreign capital into India. FIIs and FPIs jump into Indian stock markets as they offer high returns. The stock markets help strengthen the currency of the Nation.
Primary Market v/s Secondary Market-
| Primary Market | Secondary Market |
| There is the sale of securities by new companies or further (new issues of securities by existing companies to investors). | There is the trading of existing shares only. |
| Securities are sold by the company to the investor directly (or through an intermediary). | Ownership of existing securities is exchanged between investors. The company is not involved at all. |
| The flow of funds is from savers to investors, i.e. the primary market directly promotes capital formation | Enhances encashability (liquidity) of shares, i.e. the secondary market indirectly promotes capital formation. |
| Only buying of securities takes place in the primary market, securities cannot be sold there. | Both the buying and the selling of securities can take place on the stock exchange. |
| Prices are determined and decided by the management of the company | Prices are determined by demand and supply for the security. |
| There is no fixed geographical location. | Located at specified places |
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