Financial Markets

The capital market consists of the primary and secondary markets. In this article, we will study more about these markets, their meanings, key differences, and other types of financial markets.

What are the sources for raising capital in the primary market?

Public Issue

• The company issues the prospectus and invites the public to purchase its shares and debentures.

Offer for Sale

• New securities are offered to an intermediary firm or stockbroker at a fixed price only to be resold to the general public.

Private Placement

• The company sells securities to institutional brokers or investors instead of selling them to the general public. The securities are then sold to selected clients at a higher price.

Rights Issue

• It is used by a company that has already issued its shares. However, in this case, the shareholder holds the right to either accept the offer for himself or assign a part of his right in favor of another person.

E-IPOs

• The securities are issued through digital mode. The company issuing the securities first enters into a contract with any of the stock exchanges. For that, a SEBI-registered broker has to be appointed, who then works as the communication channel.

Secondary Market

A secondary market is where securities of companies are traded among investors. Investors can freely buy and sell securities without the issuing company’s involvement. The issuing company does not participate in income generation in these transactions among investors. Additionally, share valuation is based on the share’s performance in the market.

Features of the Secondary Market

Apart from ensuring fair dealing for investor protection, the secondary market’s features include:

• Creating Liquidity: The secondary market’s most important feature is creating liquidity, allowing immediate conversion of securities into cash. Since secondary market securities can be bought and sold multiple times, it aids in liquidity creation.

• Follows the Primary Market: Unlike the primary market, new securities cannot be sold for the first time in the secondary market. All new securities are first issued in the primary market and then bought and sold in the secondary market.

• Stock Exchange: The secondary market has a specific place where securities are traded, called the Stock Exchange. However, trading is not mandatory through a stock exchange only. Even two individuals can trade mutually, and it can still be considered a transaction.

• Encourages New Investment: As securities’ rates often fluctuate in the share market, many investors come to trade and earn profits, leading to new investments. This results in increased investment in the industrial sector.

Types of Secondary Market

The secondary market is mainly categorized into Stock Exchanges and Over-the-Counter markets. Here’s a brief summary:

• Stock Exchange: A stock exchange is a regulated marketplace where stocks, bonds, and other securities are bought and sold. The exchange provides a platform for buyers and sellers to come together and trade securities.

• Over-the-Counter (OTC) Market: The OTC market is a decentralized market where securities are traded directly between buyers and sellers without going through a stock exchange. OTC markets are less regulated than stock exchanges and often trade less liquid securities.

Stock Exchanges and Over-the-Counter (OTC) Markets

Stock Exchanges

• Centralized platforms that facilitate trading of securities without direct contact between buyers and sellers.
• Examples: Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) in India.
• Transactions are subject to strict regulations in securities trading.
• Act as guarantors, eliminating counterparty risks.

Over-the-Counter (OTC) Markets

• Decentralized markets primarily involving participants trading among themselves.
• No regulatory authority involved; parties deal directly, leading to counterparty risks.
• Example: FOREX (foreign exchange market).

Must Read: Regulators of Banks & Financial Institutions

Primary Market Vs Secondary Market

Now that we have a better understanding of the primary as well as the secondary market, let us also know the key differences between them. Given below is a detailed note on primary market vs secondary market.

Role in the economy

As we see above, the primary and secondary market plays a vital role in the mobilization of funds for businesses that in return facilitate the economy.

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