Sunday, April 26, 2015

Types of Capital Market: Primary and Secondary Market

Primary Market and Secondary Market
Primary Market (New Issue Market):. A primary market refers to any market where new shares of stock are sold. The primary market is the entry market for companies and investors, where a company or institution that requires initial or additional capital sells its shares or financial instrument to the investors. For example, Initial Public Offering (IPO), public offer, rights issue and bond issue are done on the primary market. The primary market is also unique that the initial buyer is the only person who can exchange the securities for funds. When companies are willing to go for publicly listed on the stock exchange and wants to collect funds from general investors, they first sell their financial instrument in the primary market. Primary market is the first place for trading financial instruments including stocks and bonds.

Mode of raising capital in the Primary market
1.     Public issue/Prospectus : Securities are issued to the general public. This is the most popular method of raising long term fund. In this method securities are offered to the public by issuing prospectus.
2.     Right issue : The equity shares of a company are issued to the existing equity shareholders in the form of right issue. In this issue additional securities are offered to the existing shareholders.
3.     Private placement : Under private placement the shares of a company are sold among the selected group of persons.

Secondary Market or Stock Exchange: Secondary market plays the complementary role of opening a window of opportunity for investors in primary issues to trade on their primary investments while giving other investors opportunity to buy shares of that company. Secondary markets are used for trading stocks between persons and other entities that may purchase them. It is considered as place of liquidation of financial assets providing no transactions barriers of them. Secondary market is also influenced by demand and supply theory and heavily affected by market forces. The Securities and Exchange Commission (SEC) oversees primary market issues and monitors investors’ interest by making investment friendly rules and regulations. Companies have to abide by regulatory frame work to keep consistent with the Securities and Exchange Commission’s regulatory guidelines.

Form the above discussion, we got the following differences between primary and secondary market:
Primary Market
Secondary Market
It deals in new securities which are issue for the first time.
It deals in already issued securities.
For Primary market, no organizational set up required.
But for a secondary market, a proper organizational set up is required.
Life of primary market is limited to point of issue of securities.
But Secondary Market has perpetual life.
It provides funds to the issuers for a particular purpose.
Funds from sell of shares can be utilised in any manner.
Individual issues are managed individually.
Manage and controlled by a central authority.
No fixed place for market.
Located at known fixed places.