PRIMARY AND SECONDARY MARKETS
Economics
INTRODUCTION
Capital markets play a crucial role in mobilising savings and directing them towards productive investments. They are broadly divided into Primary Market and Secondary Market. Together, these markets ensure capital formation, liquidity, price discovery and economic growth.
PRIMARY MARKET
What is the Primary Market?
The Primary Market is that segment of the capital market where new securities are issued for the first time to raise fresh capital. These securities may be equity shares, preference shares, debentures or bonds.
Because securities are issued here for the first time, the primary market is also known as the New Issue Market (NIM).
When a company raises money directly from investors, the transaction takes place in the primary market.
Key Features of Primary Market
• Deals with new securities only
• Funds go directly to the issuing company or government
• Securities are issued at a fixed price or discovered price
• No trading of securities takes place
• Regulated by SEBI
Role of IPO in Primary Market
When a private company raises capital from the public for the first time, it issues an Initial Public Offering (IPO).
Through an IPO:
• A private company becomes a public company
• Shares are issued directly to investors
• Company gets access to large capital
• Shares later get listed on stock exchanges
Functions of Primary Market
1. New Issue Offer
The primary market facilitates the issue of fresh securities for capital formation, expansion, diversification and modernisation of business.
2. Underwriting Services
Underwriters, generally banks and financial institutions, purchase unsold shares, guarantee minimum subscription and reduce risk for issuing companies.
3. Distribution of New Issues
Prospectus is issued and securities are distributed to investors through banks, brokers and registrars.
Types of Issues in Primary Market
Public Issue
Securities offered to the general public mainly through IPO or FPO and listed on stock exchanges.
Private Placement
Securities offered to a selected group of investors with fewer regulatory requirements.
Preferential Issue
Shares issued to a specific group at a predetermined price.
Qualified Institutional Placement (QIP)
Securities issued to Qualified Institutional Buyers such as mutual funds, banks and insurance companies.
Rights Issue and Bonus Issue
Rights issue allows existing shareholders to buy shares at discounted price.
Bonus issue involves free shares to existing shareholders.
Advantages of Primary Market
• Cost-effective capital raising
• High transparency
• Minimal price manipulation
• Encourages diversification
Disadvantages of Primary Market
• Limited information
• No historical data
• Higher risk
SECONDARY MARKET
What is the Secondary Market?
The Secondary Market is where existing securities are bought and sold among investors. Funds do not go to the issuing company.
Features
• Deals with existing securities
• Provides liquidity
• Facilitates price discovery
• Regulated by SEBI
Functions
• Continuous market for securities
• Enables exit to investors
• Mobilises savings into investments
Components of Secondary Market
Spot Market – Immediate delivery and payment
Forward Market – Future delivery and payment
Derivatives Market
Futures – Obligation to buy or sell in future
Options – Right but no obligation to buy or sell
Types of Secondary Markets
Stock Exchange
Centralised regulated platform like NSE and BSE.
Over the Counter Market
Decentralised market with higher risk. Example: Foreign Exchange Market.
Auction Market
Price discovered through bidding.
Dealer Market
Dealers quote prices. Common in bonds and forex.
Intermediaries
• Stock Broker
• Sub Broker
• Portfolio Manager
• Custodian
Benefits of Secondary Market
• Liquidity
• Easy exit
• Fair price discovery
• Investor protection
Limitations
• Price volatility
• Brokerage costs
• High risk
CONCLUSION
Primary market enables capital formation while secondary market ensures liquidity and efficient functioning of capital markets.
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Subject: Economics
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