Primary Market: This market is also called as the new issues market where company / institutions raise funds (capital) from public by issuing new securities (shares, debentures, bonds, etc.).
There are two major types of issuers of securities:
- Corporate Entities (companies) which mainly issue equity instruments (shares) and debt instruments (bonds, debentures, etc.)
- Government (Central as well as State) which issues debt securities (dated securities and treasury bills).
The types of issues made in Primary Market are:
- Public Issue
Securities are issued to general public and anyone can subscribe to them. Public issue of equity shares can be categorized as follows:- Initial Public Offer (IPO):
An IPO is where first public offer of shares is made by a company. An IPO can be in the following forms:
Fresh Issue of shares where new shares are issued by the company to the public investors. In this kind of an issue, the funds of investors will go to the company to be used for the purpose for which the issue is made.
Offer for Sale where existing shareholders such as promoters or financial institutions or any other person offer their holding to the public. In this kind of an issue, the funds of the investors will go to such sellers of the shares and not to the company. - Follow on Public Offer (FPO):
It is made by an issuer/ company that has already done an IPO in the past and is making a fresh issue of securities to the public.
- Initial Public Offer (IPO):
- Preferential Issue
In this mode of issue, securities are issued to an identified set of investors like promoters, strategic investors, employees, etc. - Rights Issue
When the Company gives its existing shareholders the right to subscribe to newly issued shares, in proportion to their existing shareholding, it is called a rights issue. - Bonus Issue
When the existing shareholders of a company are issued additional shares, in proportion to their existing shareholding and without any additional cost, then it is called a bonus issue.
In order to raise funds from public, companies need to file an offer document with SEBI which is called as the draft red herring prospectus or the draft prospectus. The prospectus contains details like the history of the company, details of the promoters, business model, financial history of the company, risks in that business, purpose for which the money is being raised, terms of issue and such other information that will help an investor to make an informed decision on investment in the shares of that company. The securities which are issued in primary market are listed on a recognized Stock Exchange in less than six (06) working days from the date of the closure of the issue. The shares are then listed on the recognized stock exchanges, where further trading of the shares takes place.
The shares allotted by the company are credited in the Demat account of the investor which is maintained with a Depository through a SEBI registered Depository Participant (DP). An investor can sell the shares on the stock exchanges through a SEBI registered Stock broker and receive the money.
Secondary market: Once the securities are issued in the primary market, they get listed on the Stock Exchanges and the investors can buy or sell these listed securities through those Stock Exchanges. Stock Exchanges have two main segments – Cash Market segment and the Derivatives Market segment.