PRIMARY MARKET VS. SECONDARY
MARKET
Harshita dutt
Priyanka chhabra
Yoogesh kumar
Manpreet mann
Raghav jaiswal
TOPIC:
PRIMARY MARKET VS SECONDARY MARKET
A brief introduction of share market
Share market has two sections primary and secondary.The
process of issuance of shares,right from the issue of prospectus till
closure of issue is part of primary market.The players in primary
market include share issuing companies,issue managers,underwriters
and share applicant.Once the share are issued,they have to be listed
on any stock exchange after which they are available for sale
purchase and become part of secondary market.The players in
secondary market include stock exchanges,brokers,subbrokers,buyers and sellers.
A Securities market is an exchange where sale and purchase
transactions of securities are conducted on the base of demand and
supply. A well-functioning securities market should be able to
provide timely and accurate information on the past transactions,
liquidity, low transaction costs (internal efficiency) and securities
prices that rapidly adjusted to all available information (external
efficiency).
The financial markets can broadly be divided into money and
capital market.
Money Market: Money market is a market for debt securities
that pay off in the short term usually less than one year, for example
the market for 90-days treasury bills. This market encompasses the
trading and issuance of short term non equity debt instruments
including treasury bills, commercial papers, bankers acceptance,
certificates





of
deposits,etc.
Capital Market: Capital market is the place where transactions
related to sale/purchase of shares and various other securities are
carried out.It is also known by various names such as stock
market,equity market,share market or long term debt market.
Instruments traded in capital market:
1. Debt Instruments.
2. Equity share (also called Common Stock)
3. Preference Shares.
4. Derivatives.
Primary market:
Primary market is the part of capital market
that deals with issuing of new securities .when a company issues
shares for the first time it is called IPO. All subsequent issue of
shares are known as FPO.
IPO and FPO are managed by MERCHANT BANKERS usually
called issue managers.
Method of Floatation of Securities in Primary Market:
The securities may be issued in primary market by the following
methods:
Public issue
through
prospectus
Offer for sale
Right issue
1. Public Issue through Prospectus:
Private
placement
E-ipos
Under this method company issues a prospectus to inform and attract
general public. In prospectus company provides details about the
purpose for which funds are being raised, past financial performance
of the company, background and future prospects of company.
The information in the prospectus helps the public to know about the
risk and earning potential of the company and accordingly they
decide whether to invest or not in that company Through IPO
company can approach large number of persons and can approach
public at large. Sometimes companies involve intermediaries such as
bankers, brokers and underwriters to raise capital from general
public.
2. Offer for Sale:
Under this method new securities are offered to general public but
not directly by the company but by an intermediary who buys whole
lot of securities from the company. Generally the intermediaries are
the firms of brokers. So sale of securities takes place in two steps:
first when the company issues securities to the intermediary at face
value and second when intermediaries issue securities to general
public at higher price to earn profit. Under this method company is
saved from the formalities and complexities of issuing securities
directly to public.
3. Private Placement:
Under this method the securities are sold by the company to an
intermediary at a fixed price and in second step intermediaries sell
these securities not to general public but to selected clients at higher
price. The issuing company issues prospectus to give details about its
objectives, future prospects so that reputed clients prefer to buy the
security from intermediary. Under this method the intermediaries
issue securities to selected clients such as UTI, LIC, General
Insurance, etc.
The private placement method is a cost saving method as company is
saved from the expenses of underwriter fees, manager fees, agents’
commission, 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.
4. Right Issue (For Existing Companies):
This is the issue of new shares to existing shareholders. It is called
right issue because it is the pre-emptive right of shareholders that
company must offer them the new issue before subscribing 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.
The stock exchange does not allow the existing companies to go for
new issue without giving pre-emptive rights to existing shareholders
because if new issue is directly issued to new subscribers then the
existing equity shareholders may lose their share in capital and
control of company i.e., it would water their equity. To stop this the
pre-emptive or right issue is compulsory for existing company.
5. e-IPOs, (electronic Initial Public Offer):
It is the new method of issuing securities through on line system of
stock exchange. In this company has to appoint registered brokers for
the purpose of accepting applications and placing orders. The
company issuing security has to apply for listing of its securities on
any exchange other than the exchange it has offered its securities
earlier. The manager coordinates the activities through various
intermediaries connected with the issue.
Secondary market
:Stock market represents the secondary
market where existing securities (shares and debentures are traded) .
Secondary market comprises of equity markets and the debt markets.
Difference between the primary market and the secondary
market
In the primary market, securities are offered to public for
subscription for the purpose of raising capital or fund. Secondary
market is an equity trading avenue in which already existing/preissued securities are traded amongst investors. Secondary market
could be either auction or dealer market. While stock exchange is
the part of an auction market, Over-the-Counter (OTC) is a part of
the dealer market.
Relationship between primary and secondary market
The new issue market cannot function without the secondary
market .the secondary market or stock market provides liquidity
for the issued securities.these securities are traded in the secondary
market offering liquidity to the stock at fair price.
The stock exchange through their listing requirements exercise
control over the primary market the company seeking listing on
stock exchange has to comply with all the rules and regulations of
the stock exchange.
The primary market provides a direct link between potential
investors and the company by providing liquidity and safety,the
stock market encourages the public to subscribe to the new issue
market.the marketability and capital appreciation provided in the
stock market are the key factor that attract the investing public to
the stock market.thus,it provides an indirect link between savers
and the company.
Even though they are complimentary ,their function and
organisational structure are different the health of primary market
depend upon secondary market and vice versa.
Advantages of Buying via an Initial Public Offer
As the investors buy shares directly from the company via IPO,there
are no brokerage or commission charges levied.
-IPO allows you buy the shares of a good company at rather cheap
prices.At listing of IPO,the prices may go significantly higher
resulting in Listing Gains in short time periods.This is the main
reason behind love for IPOs by the investors.
– If you remain invested with the company,you become a partner in
profits as a shareholder.
RECENT TREND IN PRIMARY MARKET
Average annual capital mobilisation from the primary market, which
used to be about Rs. 70 crore in the 1960s and about Rs. 90 crore in
the 1970s, increased manifold during the 1980s, with the amount
raised in 1990-91 being Rs. 4,312 crore. It received a further boost
during the 1990s with the capital raised by non-government public
companies.
There is a preference for raising resources in the primary market
through private placement of debt instruments. Private placements
accounted for about 91% of total resources mobilised through
domestic issues by the corporate sector during 2000-01. Rapid
dismantling of shackles on institutional investments and deregulation
of the economy are driving growth of this segment.
Recent trends in secondary market
Till recent past floor trading took place in all the stock exchanges
in India. In this system the trade takes place through open outcry
system during the official trading hours. Trading posts are assigned
for different securities where buy and sell activities of securities took
place.
In 1994 NSE and OTCEI was set up with the screen based
trading facility. After one year BSE introduced the screen based
trading system. And after that more and more stock exchanges
adopted screen based trading system.
In 1992 foreign institutions investors have been allowed to invest
in India.
In 1993 private sector mutual funds have been allowed.
In 2001 Derivatives in the form of futures and options are
introduced for trading and hedging purpose.
SEBI has made compulsory to all the intermediaries to register
with it.
At present trader can trade through laptops, palmtops and mobile
phones also.
The trading cycle has been shortened to T+2 from T+5 so that
investor should not wait for sale proceeds of his investments.
At present almost 99% of the scrips are dematerliased. Almost
all the traders are in the demat form.
Now balance sheet and prospectus of the company are available
to the investors.
At present NAV has to be published.
Insider trading and unfair practices are strictly prohibited.
CONCLUSION
As after the proper understanding of primary and secondary market
we can conclude that both are the two sides of same coin . The new
issue market cannot function without the secondary market .the
secondary market or stock market provides liquidity for the issued
securities.these securities are traded in the secondary market
offering liquidity to the stock at fair price. For the general investor,
the secondary market provides an efficient platform for trading of
his securities. For the management of the company, Secondary
equity markets serve as a monitoring and control conduit—by
facilitating value-enhancing control activities, enabling
implementation of incentive-based management contracts, and
aggregating information (via price discovery) that guides
management decisions.Hence based on the studies and findings we
can say both are playing crucial role in forming the base for
economy.
THANK YOU