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Indian Stock Market-Classification- Primary Market Vs Secondary Market

Introduction to Primary Market/New Issue Market

  • Primary Market is a Market for new issue of securities, which are issued to public for first time
  • Primary market is also known as New Issue Market.
  • It is used by both new and existing companies.
  • The company issues new shares and debentures for collecting long term funds. The purchaser of new shares and debentures may be businessmen, customers of the company, employees of the company, existing shareholders, etc.
  • The issue of securities is made through the prospectus. Functioning of primary markets facilitates the capital formation by channelizing of funds from individual savers into proper productive investments.

Functions of Primary Market/New Issue Market

  1.  Origination

  • In primary market, origination means to investigate, evaluate and procedure new project proposals.
  • It initiates before an issue is present in the market. It is done with the help of merchant bankers.
  • The merchant bankers can be banks, financial institutions, private investment firms, etc.
  • In primary market, the preliminary investigation involves a detailed study of economic, financial, legal, technical aspects to ensure the soundness of the project/Company
  1. Underwriting

  • Underwriting is the process by which investment bankers raise investment capital from investors on behalf of corporations and governments that are issuing either equity or debt securities.
  • The word “underwriter” originally came from the practice of having each risk-taker write his name under the total amount of risk he was willing to accept at a specified premium.
  • In primary market, to ensure success of new issue, there is a need for underwriting firms.
  • The company needs to appoint underwriters
  1. Distribution

  • In primary market, the success of any grand new issue is hinges on the issue is being subscribed by the people.
  • The sale of the securities to the supreme or highest investors is termed as distribution.
  • Distribution Job is given to brokers and dealers.
  • The brokers or agents maintain direct contact with the supreme investors

Introduction to SECONDARY MARKET

  • After the initial issuance, investors can purchase from other investors in the secondary market
  • This is the market where trading of securities is done
  • Secondary market consists of both equity as well as debt markets
  • Securities issued by a company for the first time are offered to the public in the primary market.
  • Once the IPO is done and the stock is listed, they are traded in the secondary market
  • The main difference between the two is that in the primary market, an investor gets securities directly from the company through IPOs, while in the secondary market, one purchases securities from other investors willing to sell the same

Functions of Secondary Market/Stock Exchange

  1. Economic Barometer

  • A stock exchange is a reliable barometer to measure the economic condition of a country.
  • Every major change in country and economy is reflected in the prices of shares.
  • The rise or fall in the share prices indicates the boom or recession cycle of the economy.
  • Stock exchange is also known as a pulse of economy or economic mirror which reflects the economic conditions of a country.
  1. Pricing of Securities

  • The stock market helps to value the securities on the basis of demand and supply factors
  • The securities of profitable and growth oriented companies are valued higher as there is more demand for such securities
  • The valuation of securities is useful for investors, government and creditors.
  • The investors can know the value of their investment, the creditors can value the creditworthiness and government can impose taxes on value of securities
  1. Safety of Transactions

  • In stock market only the listed securities are traded and stock exchange authorities include the company’s names in the trade list only after verifying the soundness of company.
  • The companies which are listed they also have to operate within the strict rules and regulations. This ensures safety of dealing through stock exchange.
  1. Contributes to Economic Growth

  • In stock exchange securities of various companies are bought and sold
  • This process of disinvestment and reinvestment helps to invest in most productive investment proposal and this leads to capital formation and economic growth.
  1. Providing Scope for Speculation

  • To ensure liquidity and demand of supply of securities the stock exchange permits healthy speculation of securities
  1. Liquidity

  • The main function of stock market is to provide ready market for sale and purchase of securities
  • The presence of stock exchange market gives assurance to investors that their investment can be converted into cash whenever they want
  • The investors can invest in long term investment projects without any hesitation, as because of stock exchange they can convert long term investment into short term and medium term
  1. Better Allocation of Capital

  • The shares of profit making companies are quoted at higher prices and are actively traded so such companies can easily raise fresh capital from stock market
  • The general public hesitates to invest in securities of loss making companies
  • Stock exchange facilitates allocation of investor’s fund to profitable channels
  1. Promotes the Habits of Savings and Investment

  • The stock market offers attractive opportunities of investment in various securities.
  • These attractive opportunities encourage people to save more and invest in securities of corporate sector rather than investing in unproductive assets such as gold, silver, etc.

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