Commerce · Ch 7 — Fundamentals of Financial Markets
Primary Market and Secondary Market
Primary Market and Secondary Market
6. Primary Market and Secondary Market
The capital market operates through two connected segments, distinguished by whether a security is being sold for the FIRST time or is being RESOLD among investors.
The Primary Market (New Issue Market). The segment of the capital market in which new securities are issued by a company (or the government) for the very first time, so that funds flow DIRECTLY from the investor to the issuing company. A company may raise funds in the primary market through several methods:
- Public Issue — securities are offered to the general investing public; if the company is issuing shares for the first time and getting listed for the first time, this is an Initial Public Offer (IPO); if an already-listed company issues fresh shares to the public again, this is a Further/Follow-on Public Offer (FPO).
- Rights Issue — fresh shares are offered first to the company's EXISTING shareholders, in proportion to their current shareholding, before being offered to anyone else — protecting an existing shareholder's proportionate stake in the company.
- Private Placement — securities are sold directly to a select group of institutional or other identified investors, rather than to the public at large, which is quicker and cheaper than a full public issue.
- Offer for Sale — instead of the company itself directly issuing shares to the public, existing shares already held (typically by promoters or early investors) are offered for sale to the public, often through an intermediary.
- e-IPO — a public issue made through the online, electronic system of a recognised stock exchange, rather than through the traditional physical application process.
The Secondary Market (Stock Market). The segment of the capital market in which securities that have ALREADY been issued in the primary market are subsequently bought and sold among investors, through recognised stock exchanges. Unlike the primary market, funds in a secondary-market transaction flow between one investor and another, NOT to the company that originally issued the security — the company received its funds only once, at the time of the original issue. The secondary market is dealt with in full detail in the next chapter, Stock Exchange and SEBI; for this chapter, the essential point is how it differs from, and depends on, the primary market.
| Basis | Primary Market | Secondary Market |
|---|---|---|
| What is traded | New securities, issued for the first time | Already-issued (existing) securities |
| Direction of funds | Investor → issuing company, directly | Investor → investor; the company receives nothing further |
| Common name | New Issue Market | Stock Market / Stock Exchange |
| Price | Fixed by the issuing company (or discovered via book-building) | Determined continuously by market demand and supply |
| Location | No fixed exchange; conducted through merchant bankers/underwriters | Recognised, organised stock exchanges |
Why the secondary market cannot exist without the primary market, but not the reverse …
The segment of the capital market where new securities are issued for the first time, with funds flowing directly from the investor …
The segment of the capital market where already-issued securities are bought and sold among investors through recognised stock exchanges, without any fresh flow of …
A company's first public issue of shares to the general investing public, resulting in the company getting listed on a stock excha …
An issue of fresh shares offered first to a company's existing shareholders, in proportion to their current holding, before b …