The everyday hustle of buyers, sellers, changing prices, and fluctuations are the life of the stock market. To make it a little streamlined for everyone out there, there are various stock market types.
The best thing to invest right now is in the share market. Once you have proper knowledge about it will reap you a lot of benefits out of your hard-earned money.
The stock market is in bloom, and its popularity has only increased by the day, especially amongst the millennials. The stock market is divided into two major parts, namely the primary market and the secondary market.
The style of trading and the purpose of generating funds is different in both.
First, the primary market is the first step of the ladder, and the next is the secondary market.
Here, in this article, we will understand the basic concepts of primary and secondary markets and their differences.
Stock Market Types in India
In general, there are two different types of stock market in India, the primary and secondary market.
The primary market is where the shares are issued for the first time or you can say where the company gets listed.
In other words, the primary market controls the whole process of Initial Public Offerings or IPO.
Next comes the secondary market. It is the market where the listed stocks are bought and sold by the retail investors with the help of stockbrokers. It is where the price of stocks are disclosed and being controlled.
So, trading in the share market is all about carrying out trade in the secondary stock market.
To get a better understanding of the stock market, it is important to learn the role and function of different types of share market.
Ler’s dive in to gain a proper understanding of stock market types.
Primary Stock Market
As the name suggests, the primary market is where securities are introduced to the investors for the first time. This is where the process of the stock market begins and then accelerates.
The prime function of the primary market is to raise funds. The stocks mingle with the stock exchange and help the government or companies to enhance their capital.
There are specific requirements to carry out transactions in the primary market. This includes an investor, a company, and an underwriter.
It is in the primary market where a company issues securities. It is issued as an IPO (Initial Public Offering). The responsibility of determining a sale price for this new entry lies with the underwriter.
Now, when the new securities are issued, the investors purchase them in the primary market. The whole process of issuing, purchasing, and monitoring is regulated by SEBI (Securities and Exchange Board of India).
Primary Stock Market Example
Examples of the primary market include bills, notes, and bonds (both corporate and government).
On issuing the securities, the underwriting team of the primary market determines its value that is further used to sell securities in the primary market.
There are four different ways by which an investor can buy securities in the primary market
Initial Public Offerings (IPO)
Through the IPO the companies make shares available to the public for the first time. This is the fastest way for companies to raise their funds.
It is the process of creating new shares while restricting investor access. Under this process, companies offer their shares to investors at a specific price. This helps companies to raise their money and at the same time give investors an opportunity to expand their holdings.
Under this, companies offer new shares to a small group of investors (individual or institutional). This is different from an IPO, as the issue is not open to the public.
Now, this is somewhat similar to the private placement. Here, again companies offer shares to a group of investors who could be a shareholder or someone having a connection to a company.
Primary Stock Market Function
There are various functions of the primary market. Let us discuss some of them.
Introduction of new issues. These issues are the ones that have never been a part of any official exchange.
Another essential function of the primary market is underwriting. The underwriters are responsible for buying the shares that do not get sold in the marketplace.
Therefore, predicting the returns and the investors rely on them for a significant chunk of their work.
Primary Securities Market Advantages
The primary market has a lot of advantages. There are some listed below.
There are high chances of raising capital through the primary market, and that too low cost.
The liquidity of the stocks is adequate in the primary market. This makes it convenient to sell stocks in the secondary market.
The manipulation of prices is less in the primary market.
There is no need to worry about price fluctuations. The investors already know the price they are investing in because it is decided before the IPO.
Primary Securities Market Disadvantages
Keeping apart the advantages, there are various disadvantages of the primary market as well.
The information related to the investor is limited.
There is no historical data to read and analyze because the shares are coming to the public front for the first time.
Secondary Stock Market
The market succeeding the processes of the primary market is the secondary market. The secondary market unleashes the actual trading activities of the buyers and sellers.
In the secondary market, there is no hustle of the issuing companies, therefore, the investors trade freely and conveniently. Here, the value of the share is solely based on market value.
The sale of the shares from one investor to the next generates income. In all, it is the actual stock market as all the buying and selling happens here.
Functions of Secondary Stock Market
The secondary market performs a set of functions as listed below:
The secondary market gives the investors a platform to enter the trading in the stock market. They can trade different financial instruments like bonds, debentures, and shares.
The trading in the secondary market is continuous. The benefit of this is increased liquidity.
There is a chance for investors to sell their securities in different stock exchanges.
The secondary market is also a mirror of the economy of the nation. It tells the relation between savings and investments.
Secondary Stock Market Advantages
The functions of the secondary market are diverse, and so are the advantages:
It is convenient to sell shares in the secondary market. So, when there is an urgent need for cash, investors can liquidate their stocks.
The official stock exchange governs the secondary market. So, the funds of all the investors remain a lot safer.
The money of the investors is kept in the form of securities. Therefore, the mobilization of the shares becomes easy.
Secondary Stock Market Disadvantages
On the flip side, the secondary market also has some disadvantages.
The prices in a secondary market fluctuate a lot. These fluctuations can often cause a significant loss to the investor. This is one of the major downsides of the secondary market.
The processes and formalities related to the buying and selling of shares in the stock market are cumbersome.
The secondary market is vulnerable to a lot of risks.
Primary Stock Market Vs Secondary Stock Market
Thus, it is now clear that the two stock market types differ from each other in terms of offering shares to the investor.
In general, companies enter the primary market with an objective to grow while the secondary market is all about buying and selling of shares listed in the stock exchanges of India (NSE, BSE).
Let’s now summarize the major differences between the primary and secondary markets:
Primary Vs Secondary Market
The primary market is the place where the securities are initially put forward.
The securities after the issuing are traded in the secondary market.
Issue price remains the same.
The prices fluctuate in the market.
There is not much information about the investor and investors’ fund.
The investors’ funds are accessible due to high monitoring.
The funds generated are for the issuer.
The investors generate an income for themselves.
There are two significant types of stock market in India, the primary market and secondary market. They both play their roles in the economy, there are some critical differences between both of them.
The primary market sets the base. The securities are introduced to the public for the first time in the primary market. The objective of the primary market is straightforward and clear- raising funds.
The primary market has an investor, an underwriter, and a company. These all play their specific roles in the stock market. The primary market presents new issues.
The secondary market is where the issued shares are traded. The secondary market is listed with the stock exchanges, and therefore, the data and history of investor and investors’ funds are available.
The trading happens in the secondary market, and the funds generated are directly for the investor’s benefit.
There are both disadvantages and advantages of the primary and secondary market, the key difference being their trading styles.
We hope that we understand the basic types, functions, and the working of the primary and the secondary markets.
If in case, you are looking to invest in any of the primary or secondary stock market types, feel free to provide your details in the form below: