What is primary market?

The primary market, often referred to as the "new issue market," is where companies issue new
securities to the public for the first time. In the case of equity, this proc known as an Initial Public
Offering (IPO), while for debt instruments, it involves issuing bonds or debentures. In essence, the
primary market facilitates the direct fi capital from investors to the issuing entities.

How does the primary market work?

 Organisations issue new securities in the primary market to achieve various goals such as
business expansion or funding specific projects.
 Strict regulations govern all issues in the primary market
 Companies must file statements with the Securities and Exchange Board of India (SEBI) to
offer securities for sale to investors.
 Once all the stocks or bonds in the initial offering have been sold, the primary market closes,
These securities then become available for trading and investing in the secondary market.
Types of primary markets
The primary market comprises two main segments: the equity market and the debit market.
1. Equity market
In this segment, companies issue shares to the public for the first time. This is usually done through an
IPO, where a company offers a portion of its ownership to investor in exchange for capital. The equity
market allows companies to raise funds for expansion, research and development, debt repayment, or
other
2. Debt market
In the debt market, entities issue bonds or debentures to raise capital. These are essentially loans taken
from the public, and in return, the issu the bondholders. The debt market is a crucial avenue for the
government and corporations to meet their financial obligations by borrowing from in
Functions of primary market
The primary market serves several important functions:
1. Capital formation
The primary function of the primary market is to facilitate the raising of capital by companies and
government entities. This capital is essent projects, expansion plans, and meeting operational needs.
2. Price discovery
The initial sale of securities in the primary market helps in determining their fair market value. The
pricing is influenced by factors such as the comp industry trends, and overall market conditions.
3. Investor participation
The primary market provides an opportunity for individual and institutional investors to become
stakeholders in companies or creditors to govern broadens the investor base and contributes to a more
inclusive financial market
4. Facilitates economic growth
By enabling companies to raise funds for expansion and development, the primary market contributes
to overall economic growth. It encourages ent creation, and innovation.
Advantages:
1. Capital infusion
The primary stock market allows companies and governments to raise capital for various purposes,
fostering economic growth and development.
2. Investor profit potential
Investors participating in the primary stock market, especially during an IPO, have the potential to
benefit from capital appreciation if the value of the securities the secondary market.
3. Transparent pricing
The primary market contributes to price discovery, ensuring that securities are initially priced based
on market demand, financial performance and other relevant factors
4. Diversification of investment opportunities
Investors can diversify their portfolios by investing.
Disadvantages:
1. Market risks
The primary market is not immune to market risks. Factors such as economic downturns, industry-
specific challenges, and geopolitical events can impact of newly issued securities.
2. Lack of liquidity
Unlike the secondary market, where securities can be bought and sold easily, the primary market
involves a lock-in period for initial investors. This lack of disadvantage for those who may need to
liquidate their investments quickly.
3. Information asymmetry
Investors may face challenges in obtaining accurate and comprehensive information about a company
during an IPO. This information asymmetry car investors who rely on incomplete or inaccurate data.
4. Volatile initial performance
The performance of securities in the secondary market can be highly volatile initially. This volatility
may lead to unpredictable outcomes for investors both positive and negative.
Types of primary market issuance:
Public issue
A public issue is the most prevalent method for companies to offer their securities to the general
public, primarily through an Initial Public Offering (IPO). This process allows private companies to
transition into publicly traded entities. Funds raised through an IPO can be used for business
expansion, improving infrastructure, or repaying debts. By listing on stock exchanges, companies gain
increased liquidity and the opportunity to raise additional capital through further share issuances.
IPOs are regulated by the Securities and Exchange Board of India (SEBI), which ensures transparency
and accountability by requiring detailed disclosures in the company's prospectus.
Private placement
In a private placement, companies offer securities to a select group of investors, such as individuals or
institutions, instead of the general public. This method is faster, less regulated, and incurs lower costs
than an IPO, making it ideal for start-ups or early-stage companies. Common recipients include
investment banks, hedge funds or high- net-worth individuals (HNIs). Private placements allow
companies to remain private while raising the necessary capital efficiently.
Preferential issue
A preferential issue is a quick and targeted method of raising funds, where a company offers shares or
convertible securities to a specific group of investors. Both listed and unlisted companies can use this
approach. Preference shareholders benefit from receiving dividends before ordinary shareholders.
This method is distinct from public and rights issues, providing a flexible fundraising avenue.
Qualified institutional Placement (QIP)
Qualified institutional placement (QIP) involves a listed company issuing securities, such as equity
shares or convertible debentures, to Qualified Institutional Buyers (QIBs).
These are experienced market participants, including mutual funds, foreign institutional investors,
public financial institutions, and banks. QIPs offer a streamlined process with fewer regulatory
requirements compared to preferential allotments, making them a time-efficient way to raise funds.
Rights and bonus issues
Rights and bonus issues cater to existing shareholders. In a rights issue, companies allow shareholders
to purchase additional securities at discounted prices within a set timeframe. This method strengthens
shareholder control while eliminating additional issuance costs. Conversely, a bonus issue involves
awarding free shares to existing shareholders, acting as a reward rather than a capital-raising
mechanism, as no fresh capital is infused.
Factors to consider while investing in the primary market:
1. Company fundamentals: Assess the company's financial health, management, industry trends, and
growth prospects before investing
2. Valuation: Ensure the share price aligns with the company's intrinsic value to avoid overpaying
3. Purpose of investment: Define your financial goals and risk tolerance to make informed decisions
4. Market conditions: Consider overall market trends and specific risks related to the company or
industry.
5. Underwriters and lead managers: Evaluate the reputation and track record of the underwriters and
lead managers facilitating the issuance.

Methods of Floatation in Primary Market

There are many ways and means by which an Indian company can issue its shares in the financial
market. They are as follows:
Method 1: Public Issue
As the name suggests, this method allows anyone belonging to any part of India to subscribe for the
securities or invest in the particular company’s stocks. When an offer is made by the company so that
more and more people become a part of the shareholder’s family, it is known as a public issue.
Public Issue is further divided into:
Initial Public Offer (IPO)
Through Initial Public Offer or IPO, only a certain amount of the securities that the company has
fixed is made public. The specific securities are available for subscription to the public for the very
first time. The Initial Public Offering had many methods making it public, including fixed price
method, book building method, or an amalgamation of both.
Further Public Offer (FPO)
It also goes by the name, Seasoned or Subsequent Public Offer. Through this, an Indian company
makes a fresh set of securities available to the public for subscription. It is also termed as “Follow On
Public Offer”.
Method 2: Private Placement
As per the name, private placement is the method of placing the shares from an Indian company to a
selected number of people. The number of people should not exceed 50 or as prescribed in any case.
When the issuing of the shares by the issuer is not a public issue nor a rights issue, it is termed as a
private placement in the primary market. Since the issuing of the shares is private and limited, mainly
brokers buy these securities and further sell them to their clients. The brokers are wholesalers of the
stocks here. The promoters can sell a portion of the securities to their family members, friends, or
well-wishers. However, the promoters have to make a minimum contribution before the issue is made
public. Mutual funds, financial institutions, and other such organisations subscribe to private
placement orders. The private placement in the primary and secondary market can be of two kinds:
Preferential Issue/Allotment
Preferential Issue deals with issuing securities to a selected or specific group of people. It is done on a
private placement basis. The issue price should be higher than the average high or low of the closing
price.
Qualified Institutions Placement (QIP)
As the name suggests, the Qualified Institutions Placement is only made to the renowned institutions
in the financial sector. The shares can be converted to equity.
Method 3: Rights Issue
The shares that are being offered to the existing shareholders of any company are termed as a rights
issue in the primary market. However, the shares are offered in a particular proportion and not
haphazardly. This is an effective way of fundraising for successful companies. The amount of funds
needed by the company decides the proportion of the securities to be sold to the shareholders.

Method 4: Bonus Reserves

Through bonus reserves, the securities are distributed to the existing shareholders by the free reserves
present in the company. It is served as a bonus to the shareholders, and they do not have to pay any
extra amount for these shares. The various Indian companies are interested in this method as it brings
up the value of shares.
Method 5: Employees Stock Option Plan (ESOP)
As the name suggests, through this method, the employees of a company can have a share of the
securities. Many ways and means are specified for the employees to receive the company’s stocks in
the primary market. The Employee Stock Option Plan is provided to the employees at a higher
position, including the director, chairman, manager, and so on. The stocks are made available to them
at a predetermined price and the date for the purchase is also specified. The ESOP is provided to the
employees so that they can avail this service. The employees can buy the stocks directly, or they can
receive them as a bonus. The last option is the Employees Stock Option Plan or ESOP.
Primary market intermediaries
 Merchant bankers Merchant bankers play an important role in issue management process.
Lead managers (category I merchant bankers) have to ensure correctness of the information
furnished in the offer document. They have to ensure compliance with SEBI rules and
regulations as also Guidelines for Disclosures and Investor Protection. To this effect, they are
required to submit to SEBI a due diligence certificate confirming that the disclosures made in
the draft prospectus or letter of offer are true, fair and adequate to enable the prospective
investors to make a well informed investment decision. The role of merchant bankers in
performing their due diligence functions has become even more important with the
strengthening of disclosure requirements and with SEBI giving up the vetting of prospectuses.
SEBI's various operational guidelines issued during the year to merchant bankers primarily
addressed the need to enhance the standard of disclosures.

It was felt that a further strengthening of the criteria for registration of merchant bankers was
necessary, primarily through an increase in the net worth requirements, so that their capital
would be commensurate with the level of activities undertaken by them. With this in view, the
net worth requirement for category I merchant bankers was raised in 1995-96 to Rs. 5 crore.
In 1996-97, the SEBI (Merchant Bankers) Regulations, 1992 were amended to require the
payment of fees for each letter of offer or draft prospectus that is filed with SEBI. Part III
gives further details of the registration of merchant bankers during 1996-97.
 Underwriters Underwriters are required to register with SEBI in terms of the SEBI
(Underwriters) Rules and Regulations, 1993. In addition to underwriters registered with SEBI
in terms of these regulations, all registered merchant bankers in categories I, II and III and
stockbrokers and mutual funds registered with SEBI can function as underwriters. Part III
gives further details of registration of underwriters. In 1996-97, the SEBI (Underwriters)
Regulations, 1993 were amended mainly pertaining to some procedural matters.
 Bankers to an Issue Scheduled banks acting as bankers to an issue are required to be
registered with SEBI in terms of the SEBI (Bankers to the Issue) Rules and Regulations,
1994. These regulations lay down eligibility criteria for bankers to an issue and require
registrants to meet periodic reporting requirements. Part III gives further details of registration
of bankers to an issue.
 Portfolio managers Portfolio managers are required to register with SEBI in terms of the
SEBI (Portfolio Managers) Rules and Regulations, 1993. The registered portfolio managers
exclusively carry on portfolio management activities. In addition all merchant bankers in
categories I and II can act as portfolio managers with prior permission from SEBI. Part III
gives further details of the registration of portfolio managers.
 Debenture trustees Debenture trustees are registered with SEBI in terms of the SEBI
(Debenture Trustees) Rules and Regulations, 1993. Since 1995-96, SEBI has been monitoring
the working of debenture trustees by calling for details regarding compliance by issuers of the
 terms of the debenture trust deed, creation of security, payment of interest, redemption of
debentures and redressal of complaints of debenture holders regarding non-receipt of
interest/redemption proceeds on due dates. Part III gives further details of the registration of
debenture trustees.
 Registrars to an Issue and Share Transfer Agents Registrars to an issue (RTI) and share
transfer agents (STA) are registered with SEBI in terms of the SEBI (Registrar to the Issue
and Share Transfer Agent) Rules and Regulations, 1993. Under these regulations, registration
commenced in 1993-94 and is granted under two categories: category I - to act as both
registrar to the issue and share transfer agent and category II - to act as either registrar to an
issue or share transfer agent. With the setting up of the depository and the expansion of the
network of depositories, the traditional work of registrars is likely to undergo a change.

What is the Secondary Market?

A secondary market is a platform wherein the shares of companies are traded among investors. It
means that investors can freely buy and sell shares without the intervention of the issuing company. In
these transactions among investors, the issuing company does not participate in income generation,
and share valuation is rather based on its performance in the market. Income in this market is thus
generated via the sale of the shares from one investor to another.
Some of the entities that are functional in a secondary market include –
 Retail investors.
 Advisory service providers and brokers comprising commission brokers and security dealers,
among others.
 Financial intermediaries including non-banking financial companies, insurance companies,
banks and mutual funds.
Different Instruments in the Secondary Market
The instruments traded in a secondary market consist of fixed income instruments, variable income
instruments, and hybrid instruments.
 Fixed income instruments
Fixed income instruments are primarily debt instruments ensuring a regular form of payment such as
interests, and the principal is repaid on maturity. Examples of fixed income securities are –
debentures, bonds, and preference shares.
Debentures are unsecured debt instruments, i.e., not secured by collateral. Returns generated from
debentures are thus dependent on the issuer’s credibility.
As for bonds, they are essentially a contract between two parties, whereby a government or company
issues these financial instruments. As investors buy these bonds, it allows the issuing entity to secure a
large amount of funds this way. Investors are paid interests at fixed intervals, and the principal is
repaid on maturity.
Individuals owning preference shares in a company receive dividends before payment to equity
shareholders. If a company faces bankruptcy, preference shareholders have the right to be paid before
other shareholders.
  Variable income instruments
Investment in variable income instruments generates an effective rate of return to the investor, and
various market factors determine the quantum of such return. These securities expose investors to
higher risks as well as higher rewards. Examples of variable income instruments are – equity and
derivatives.
Equity shares are instruments that allow a company to raise finance. Also, investors holding equity
shares have a claim over net profits of a company along with its assets if it goes into liquidation.
As for derivatives, they are a contractual obligation between two different parties involving pay-off
for stipulated performance.
 Hybrid instruments
Two or more different financial instruments are combined to form hybrid instruments. Convertible
debentures serve as an example of hybrid instruments.
Convertible debentures are available as a loan or debt securities which may be converted into equity
shares after a predetermined period.
Functions of Secondary Market
 A stock exchange provides a platform to investors to enter into a trading transaction of bonds,
shares, debentures and such other financial instruments.
 Transactions can be entered into at any time, and the market allows for active trading so that
there can be immediate purchase or selling with little variation in price among different
transactions. Also, there is continuity in trading, which increases the liquidity of assets that
are traded in this market.
 Investors find a proper platform, such as an organised exchange to liquidate the holdings. The
securities that they hold can be sold in various stock exchanges.
 A secondary market acts as a medium of determining the pricing of assets in a transaction
consistent with the demand and supply. The information about transactions price is within the
public domain that enables investors to decide accordingly.
 It is indicative of a nation’s economy as well, and also serves as a link between savings and
investment. As in, savings are mobilised via investments by way of securities.
Types of Secondary Market
Secondary markets are primarily of two types – Stock exchanges and over-the-counter markets.
 Stock exchange
Stock exchanges are centralised platforms where securities trading take place, sans any contact
between the buyer and the seller. National Stock Exchange (NSE) and Bombay Stock
Exchange (BSE) are examples of such platforms.
Transactions in stock exchanges are subjected to stringent regulations in securities trading. A stock
exchange itself acts as a guarantor, and the counterparty risk is almost non-existent. Such a safety net
is obtained via a higher transaction cost being levied on investments in the form of commission and
exchange fees.
 Over-the-counter (OTC) market
Over-the-counter markets are decentralised, comprising participants engaging in trading among
themselves. OTC markets retain higher counterparty risks in the absence of regulatory oversight, with
the parties directly dealing with each other. Foreign exchange market (FOREX) is an example of an
over-the-counter market.
In an OTC market, there exists tremendous competition in acquiring higher volume. Due to this
factor, the securities’ price differs from one seller to another.
Apart from the stock exchange and OTC market, other types of secondary market include auction
market and dealer market.
The former is essentially a platform for buyers and sellers to arrive at an understanding of the rate at
which the securities are to be traded. The information related to pricing is put out in the public
domain, including the bidding price of the offer.
Dealer market is another type of secondary market in which various dealers indicate prices of specific
securities for a transaction. Foreign exchange trade and bonds are traded primarily in a dealer market.
Advantages of Secondary Market
 Investors can ease their liquidity problems in a secondary market conveniently. Like, an
investor in need of liquid cash can sell the shares held quite easily as a large number of buyers
are present in the secondary market.
 The secondary market indicates a benchmark for fair valuation of a particular company.
 Price adjustments of securities in a secondary market takes place within a short span in tune
with the availability of new information about the company.
 Investor’s funds remain relatively safe due to heavy regulations governing a secondary stock
market. The regulations are stringent as the market is a source of liquidity and capital
formation for both investors and companies.
 Mobilisation of savings becomes easier as investors’ money is held in the form of securities.
Disadvantages of Secondary Market
 Prices of securities in a secondary market are subject to high volatility, and such price
fluctuation may lead to sudden and unpredictable loss to investors.
 Before buying or selling in a secondary market, investors have to duly complete the
procedures involved, which are usually a time-consuming process.
 Investors’ profit margin may experience a dent due to brokerage commissions levied on each
transaction of buying or selling of securities.
 Investments in a secondary capital market are subject to high risk due to the influence of
multiple external factors, and the existing valuation may alter within a span of a few minutes.
 Difference between Primary and Secondary Market

Primary Market Secondary Market

Securities are initially issued in a primary market. Trading of already issued securities takes place in a
After issuance, such securities are listed in stock secondary market.
exchanges for subsequent trading.

Investors purchase shares directly from the issuer in Investors enter into transactions among themselves to
the primary market. purchase or sell securities. Issuers are thus not involved
in such trading.

The stock issue price in a primary market remains Prices of the traded securities in a secondary market
fixed. vary according to the demand and supply of the same.

Sale of securities in a primary market generates fund Transactions made in this market generate income for
for the issuer. the investors.

Issue of security occurs only once and for the first Here, securities are traded multiple times.
time only.

Primary markets lack geographical presence; it cannot A secondary market, on the contrary, has an
be attributed to any organisational set-up as such. organisational presence in the form of stock exchanges.

Who is a Stock Broker

A stockbroker, also known as a broker, is a financial market representative who operates in securities.
Their primary job role dictates obtaining purchase and sale orders and execution of the same. Market
participants or investors rely on their expertise and knowledge regarding market dynamics to invest in
stocks and other investment options.

Types of Stock Brokers

 Traditional or Full-time Brokers
Full-time Brokers provide a vast assortment of products and services to its customers. These services
involve securities trading, investment advice, retirement planning, management of
investment portfolio, taxes on capital gains, etc. Full-time stockbrokers charge a hefty commission,
however, given the range of their services, such cost might justify.
As was earlier mentioned, such brokers go through rigorous training and examinations to attain the
job and thus have in-depth knowledge regarding the stock market. Therefore, they are adequately
trained to make a bid on your behalf, steer your portfolio to its maximum earning potential and
minimise risks.
 Discount Brokers
Discount or online stock brokers dominate the band of brokers. Along with their inexpensive nature,
they also offer convenience to the laymen in terms of time and place utility. Market participants do not
need to personally meet discount brokers and carry out their investments through the Internet.
Investors with minimal disposable income can also start investing in the stock market through
discount brokers. However, not all discount brokers offer the same level of expertise as a traditional
broker and thus are a less profitable option for companies and individuals who can afford hefty
investment corpus and costs.
 Jobbers
These are independent brokers who trade in securities for their own sake and not on behalf of other
investors. They are not licensed to trade in someone else’s name and cannot levy commissions from
others.
They quote two prices on stocks, one of which is the buy price quote and the other is the sale price
quote. The gap between these two prices is their profit margin.
 Arbitrageurs
This subset of stockbrokers is known to purchase securities from one stock exchange at a lower price
and then sell the same at a higher price in a different stock exchange.