- A market where new securities are bought and sold for the first time is called the New Issues market or the IPO market. In other words, the first public offering of equity shares or convertible securities by a company which is followed by the listing of a company’s shares on a stock exchange is known as an initial public offering (IPO).
- The Primary market also includes issue of further capital by companies whose shares are already listed on the stock exchange.
- There are different types of intermediaries operating in this segment of capital market. They play a crucial role in the development of capital market by providing a variety of services. These intermediaries viz., merchant bankers, brokers, bankers to issues, debenture trustees, portfolio managers, registrars to issues and share transfer agents, etc., are regulated by SEBI.
- Secondary Market
- It is a market in which an investor purchases a security from another investor rather than the issuer, subsequent to the original issuance in the primary market.
- So, it can be stated that secondary markets are the stock exchanges and the over-the-counter market. When the securities are transferred from the first holder to another, the securities are said to be traded in secondary markets.
- Primary Market vs. Secondary Market
- The primary and secondary markets are both platforms in which corporations fund their capital requirements. While the functions in the primary stock exchange are limited to first issuance, a number of securities and financial assets can be traded and retraded over and over again.
- The main difference is that, in the primary market, the company is directly involved in the transaction, whereas in the secondary market, the company has no involvement since the transactions occur between investors.
The difference
between primary market and secondary market
1. The Primary market refers to the market where
new securities are issued by the company that wishes to obtain capital and is
sold directly to the investor while the secondary market refers to the market
where securities that have already been issued are traded. Instruments that are usually traded on the secondary market include stocks, bonds, options and futures.
2.In the primary market, the company is directly
involved in the transaction, whereas in the secondary market, the company has
no involvement since the transactions occur between investors.
3.The primary markets deal with new securities,
that is, securities, which were not previously available and are, therefore,
offered to the investing public for the first time while the secondary market
is a market for already issued securities.
4. Primary market provides additional funds to the
issuing companies either for starting a new enterprise or for the expansion or
diversification of the existing business.On the other hand, the secondary
market can in no circumstance supply additional funds since the company is not involved in the transaction.
Similarities between Pri mary and Secondary Markets
Some
of the similarities between them are as follows:
(a) Listing: The securities issued in the
primary market are invariably listed on a recognized stock exchange for
dealings in them. Further trading in secondary market can also be carried out
only through the stock exchange platform. The listing on stock exchanges provides liquidity as well as marketability to the securities and facilitates discovery
of prices for them.
(b) Control by Stock Exchanges: Via the
mechanism of Listing Agreement between the issuer companies and the stock
exchange, the stock exchanges exercise considerable control over the new issues
as well securities already listed on the stock exchange. Stock Exchanges ensure
that there is continuous compliance by the issuer company of the clauses
provided in the Listing Agreement.
Interrelationship between
Primary Markets and Secondary Markets
The markets for new and old securities are, economically, an integral
part of a single market – the capital market. Their mutual interdependence from
the economic point of view has following two dimensions:
v One,
the quantum of trading and the participation of the investors on stock exchange
has a significant bearing on the level of activity in the primary market and,
therefore, its responses to capital issues.
v Second,
the dimension of mutual interdependence is based on the fact that the level of
activity in primary market has a direct impact on the level of activity in
secondary market. As more and more companies issue their securities in the capital market,
investment options for investors increase which leads to a wider participation
by investors in the secondary market.
Participants in the Capital Market
v Investors: Investors are the lifeline of
any capital markets. For a vibrant capital market, the capital market should be
able to attract the savings of investors. Investors belong to various categories such as Retail Investors, Institutional Investors like mutual funds,
insurance companies and Foreign Portfolio Investors.
v Stock Exchange: Stock Exchange is a
place where securities issued by issuer companies are listed and traded. The
term is synonymously used for secondary markets.
v Depository: A depository is an
organisation which holds securities (like shares, debentures, bonds, government
securities, mutual fund units etc.) of investors in electronic form at the request of the investors through a registered Depository Participant. It also provides services related to transactions in
securities. In India there are two depositories namely National Securities
Depository Limited (NSDL) and Central Depository Services (India)Limited (CDSL).
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