In Part 1 and Part 2 of Introduction to Securities Market, we explored different financial instruments like equity, bonds, mutual funds, ETFs, and more. But now I’ll discuss where do these instruments actually get issued and traded? That’s where the primary and secondary markets come in. Let’s break them down with simple explanations and examples.
What are Primary and Secondary Markets?
Primary Market (New Issue Market)
- This is the market where companies issue securities for the first time to raise money from general public.
- Investors buy directly from the company.
- Money goes to the company.
Example:
- When a company issues IPO (Initial Public Offering), it is happening in the primary market.
- Suppose Zomato issues new shares in its IPO, investors pay money to Zomato, and Zomato gets all the money.
Secondary Market (Stock Market)
- This is the market where already issued securities are traded among investors.
- Investors buy and sell with each other, not with the company.
- Money goes from one investor to another (company doesn’t get funds).
Example:
- After Zomato’s IPO, its shares are listed on NSE/BSE.
- If you buy Zomato shares from another investor on NSE, that is secondary market trading.
Easy way to remember:
Primary Market = New issue (company gets money)
Secondary Market = Trading of old shares (investors get money)
Now I will explain you all the important terms related to primary market in short and simple. So let’s get started.
Primary Market
1. IPO
- IPO = Initial Public Offering
- It is the first time a company offers its shares to the public and gets listed on a stock exchange.
- Through IPO, the company raises money from investors for business growth.
2. FPO
- FPO = Follow-on Public Offer
- It is when a company that is already listed on a stock exchange issues more shares to the public to raise extra money.
- Unlike IPO (first-time issue), FPO happens after IPO.
3. Private Placement
- Private Placement means when a company issues its shares or debentures not to the public, but only to a small group of selected investors.
- These investors can be banks, mutual funds, insurance companies, venture capitalists, or wealthy individuals.
- It is a faster and less costly way of raising funds compared to IPO or FPO.
Types of Private Placement:
- Preferential Allotment – Shares are given to selected investors at a pre-decided price.
- Qualified Institutional Placement (QIP) – Shares are issued only to Qualified Institutional Buyers (like mutual funds, banks, insurance firms).
Easy way to remember:
Private Placement = Shortcut to raise money by selling shares/debentures to a few big investors instead of the public.
4. Rights Issue
- A Rights Issue means when a company gives its existing shareholders the right (option) to buy additional shares of the company at a discounted price and within a fixed time.
- It is offered only to current shareholders, not to the general public.
Example:
- Let’s say you own 100 shares of Infosys.
- Infosys announces a Rights Issue of 1:10 at ₹900, while current market price is ₹1,200.
- This means, for every 10 shares, you can buy 1 extra share at ₹900.
- You can buy 10 extra shares at a discount or sell your rights to another interested investor.
Easy way to remember:
Rights Issue = Extra shares offered at discount, only for existing shareholders, in proportion to their holdings.
5. Bonus Issue
- Bonus Issue means a company gives extra shares to its existing shareholders for free.
- No money is charged from the shareholders.
- It is usually done by converting reserves or profits into shares.
Example:
- Let’s say you own 100 shares of TCS.
- TCS announces Bonus Issue 1:5, for every 5 shares, you will get 1 extra share.
- You will get 20 extra shares for free.
- Total shares you now have is 120, but the total value of your investment remains roughly the same as the share prices are adjusted.
Easy way to remember:
Bonus Shares = Free shares given to existing shareholders from company’s reserves, as a reward.
6. Onshore and Offshore Offerings
Onshore Offerings
- Onshore Offering means a company raises funds within its own country.
- Investors are usually domestic investors.
- It is regulated by the country’s local laws.
Offshore Offerings
- Offshore Offering means a company raises funds outside its home country.
- Investors are foreign investors.
- It is regulated by the foreign country’s rules and sometimes by home country’s rules.
Easy way to remember:
Onshore Offering = Raising money within the home country
Offshore Offering = Raising money in foreign markets
7. Offer for Sale (OFS)
- Offer for Sale is a process where existing shareholders of a company (usually promoters or large investors) sell their shares to the public or institutional investors through the stock exchange.
- The company does not get money in this process; the money goes to the selling shareholders.
- It is done to reduce promoter holding or provide an exit to investors.
Example:
- Let’s say Promoter of Infosys wants to sell 1 lakh shares to reduce his holding.
- Infosys lists these shares for sale through OFS on NSE/BSE.
- Investors can bid and buy these shares at market price.
- Money received goes to the promoter, not Infosys.
Easy way to remember:
OFS = Existing shareholders sell their shares to the public via stock exchange; company does not receive money.
Secondary Market
1. Over-the-Counter (OTC)
- OTC means buying and selling securities directly between two parties, without using a formal stock exchange.
- Transactions happen through brokers, dealers, or electronically, not on NSE/BSE.
Example:
- Let’s say you want to buy shares of a small startup that is not listed on NSE/BSE.
- You contact a broker or dealer who has these shares.
- You agree on price and trade directly, this is an OTC transaction.
Easy way to remember:
OTC = Buying and selling securities directly between parties, without using a stock exchange.
2. Exchange Traded Market
- Exchange Traded Market means a market where securities (shares, bonds, derivatives) are bought and sold through a recognized stock exchange like NSE or BSE.
- All trades are regulated, transparent, and standardized.
3. Clearing and Settlement
Clearing
- Clearing is the process of matching and verifying buy and sell orders after a trade is executed.
- It ensures that both buyer and seller agree on the trade details like quantity, price, and date.
- Clearing is usually done by a clearing corporation or clearinghouse.
Example:
- You buy 100 shares of TCS on NSE.
- The clearinghouse checks:
- You have enough money.
- Seller has enough shares.
- Once verified, the trade is cleared.
Settlement
- Settlement is the process of transferring the shares and money between buyer and seller after clearing.
- It is the final step where ownership of shares changes hands and payment is made.
- Settlement can be T+1, T+2, T+3 depending on the exchange rules (T = trade date).
Example:
- You bought 100 shares of TCS on NSE on Monday (T).
- If NSE has T+2 settlement, the shares and money are exchanged on Wednesday.
Easy way to remember:
Clearing = Checking trade
Settlement = Completing trade
That completes Part 3 of Chapter 2 – Introduction to Securities Market. Together with Part 1 & Part 2, you now have a full overview of all major primary & secondary markets that appear in the NISM Research Analyst exam. However, Chapter 2 is not yet complete, now in Part 4, I will cover Various Market Participants and Their Activities. And that will complete chapter 2.