Stock market is a place where we can buy or sell equity shares of listed companies.
THE PRIMARY MARKET & SECONDARY MARKET
In this topic, we will learn about Capital Market. Now we will see the types of capital market.
So, basically there are two types of capital market:
- Primary market
- Secondary market
In the primary market, shares & bonds are sold for the first time or issued for collecting long-term capital. In the primary market, securities are issued by companies, government entities or public institutions directly to investors. The primary market is all about new issues hence called as “New Issue Market”. The money collected from the primary market can be used by companies to modernize the plant, repayment of debt, setting up a new business plant, for expansion of business etc.
Some common methods of raising capital in the primary market are as follows:
1) PUBLIC ISSUE : IPO & FPO
As the name suggests, public issue means selling securities to the public. An example of a primary market is the company’s initial public offering, or IPO, in which it sells stocks to the general public for the first time. An IPO occurs when a company sells stocks to the public for the first time. In IPO, the money paid by the public for the newly issued shares goes directly to the comany. If the company has already issued shares in the stock market & again want to issue its shares, then the process is known as “Follow on Public Offer”(FPO). In the primary market, you cannot buy shares directly. You need to apply separately to buy shares in the primary market. We will try to cover the whole procedure of IPO in the next session.
2) PRIVATE PLACEMENT
In this method, the securities are sold by the company to an intermediary at a fixed price and intermediaries sell these securities to it’s selected clients at a higher price. The issuing company issues prospectus to give details about its objectives, future prospects, the reason behind raising the capital so that reputed clients prefer to buy the security from the intermediary. Under this method the intermediaries issue securities to selected investors like frequent investors, venture capital (VC’s), mutual funds and banks.
The private placement method is a cost effective method for issuing securities as the company is saved from the expenses of underwriting fees, manager fees, the listing of company’s name in stock exchange etc. Small and new companies prefer private placement as they cannot afford to raise from public issue. The private placement is all about selling securities to the restricted number of investors. IPO is a lengthy process to raise money, whereas private placement is a faster way for the company to raise capital.
3) RIGHT ISSUE
As the name suggests, a right issue is the issue of new shares to existing shareholders. When listed company issue fresh securities to existing shareholders it is known as Right Issue. It is called right issue because it is the right of shareholders that the company must offer them the new issue before allowing shares to outsiders. Each shareholder has the right to subscribe to the new shares in the proportion of shares he already holds. A right issue is mandatory for companies under Companies’ Act 1956.
Prerequisites for Investors to Participate in Primary market activities are as follows:
- PAN Number
- Bank Account
- Demat Account
What we call stock market is nothing but the secondary market where securities are traded after being initially offered to the public in the primary market. Once issued in the primary market, the securities, then typically trade on a secondary market such as stock exchanges or bond markets.This includes the National Stock Exchange (NSE), Bombay Stock Exchange (BSE), New York Stock Exchange (NYSE), and all major exchanges around the world. The defining characteristic of the secondary market is that investors trade among themselves i.e, money pass between investors. In the secondary market, investors trade previously issued securities without the issuing companies’ involvement.
For example, if you are buying shares of Infosys, you are dealing only with another investor who owns shares in Infosys. Infosys is in no way involved with the transaction. i.e, shares of Infosys are sold by and transferred from one investor to another. Whenever you buy shares directly from stock market, then you are actually buying shares from the secondary market.
Secondary market could be either auction or dealer market. While the stock exchange is the part of an auction market & Over the counter (OTC) is a part of the dealer market. National Stock Exchange (NSE), Bombay Stock Exchange (BSE)are the examples of the auction market. OTC is a privately negotiated contract made by two parties. Deals through OTC are not exchange traded deals. OTC uses communication modes such as the telephone, email etc. In the primary market, securities are offered to public for the purpose of raising capital. Whereas secondary market is an equity trading platform in which already existing securities are traded amongst investors.