You often hear about the primary and secondary stock markets. Do you know what it means? What is the difference between the two? Actually, there are two types of the stock market. The first is the primary market and the second is the secondary market. Let us try to know about these two markets and their functioning.
The primary market is the place where companies first offer their shares to the public. This is known as an Initial public offer (IPO). After that, shares are traded on a daily basis in the secondary market. In the primary market Companies, Governments or PSIs can raise funds through Bond issues and companies can raise capital through the sale of new stocks through an IPO.
What is an IPO?
An IPO is a procedure where a company offers equity to investors and becomes a public traded company. With Initial Public Offers, the company can raise funds and investors will be eligible to invest in a company for the first time.
How can a company raise the funds from the Primary Market?
A company can raise the funds from the Primary Market in the below-mentioned ways-
Players of the Primary Market
Below mentioned are the players of the Primary Market-
Primary market issues have registrars (registered to SEBI). These registrars are responsible for collecting investor applications and keeping track of these applications. The registrars keep track of any money received from investors, as well as money paid to sellers, and assist companies to determine the allocation of shares through consulting stock exchanges. The process of allotting shares to those who have applied and sending out allotment letters is also overseen by registrars.
2. Merchant Bankers
Merchant bankers are responsible for determining the capital structure of a company, as well as drafting a prospectus. These forms are then submitted to SEBI for approval to list stocks on stock exchanges. Merchant Bankers are responsible for all compliance formalities.
They also appoint registrars. They look at the listing and placing of securities, the arrangement for underwriting, placing of issues, selections of brokers, bankers to issue, publicity and advertising agencies, printers, etc.
The role of the underwriters is important when a company is listed. In case the company does not meets the minimum subscription and there are not enough subscribers, the underwriter agree to purchase all securities They ensure that all shares are subscribed to by them or others. The companies appoint underwriters after consulting with merchant bankers.
4. Share Transfer Agent
The stock transfer agent is treated as the "official keeper" of the company's shareholder records. The stock transfer agents furnish the issuer with a list of holders of its securities. They work on the transfer of beneficial ownership and process corporate actions like stock or cash dividends, stock rights, stock splits, and collation of proxy forms.
Secondary Market is the market where existing shares, debentures, or bonds are traded among investors. After the initial public offering of shares, where the securities are first offered in the primary market are thereafter traded on the secondary market. Secondary market is also termed Follow on Public offering and Aftermarket. In secondary market, the trade is done between a buyer and seller, and the stock exchange facilitates the transaction.
Stockbrokers act as direct links between investor and markets. Stockbrokers facilitate trades in secondary markets. An investor can place orders with any SEBI registered broker, such as Paytm Money, because you cannot place an order directly in the market.
To buy or sell shares you will need to transfer money directly to your broker. The broker will execute the trade and ensure that you get the shares.
The depository houses all records and certificates for investors who have a Demat account. Every listed entity must become a member to maintain all records regarding shares they have issued.
In India there are two depositories-
- NSDL (National Securities Depository Limited) and
- CDSL (Central Depository Services Limited)
SEBI regulates depositories and ensures that all shareholders of listed companies have information.
3. Clearing Corporation
Clearing Corporation in stock market ensures that the trades are executed successfully and that investors' Demat accounts are credited or debited with shares. Clearing Corporation guarantees delivery of shares and provides transparency for buying and selling shares.
4. Agents for Share Transfer
A company may appoint a share transfer agent to keep track of shareholders who have been issued securities. Agent who transfers shares also handle the redemption and transfer of securities.
Stock Market Players are crucial in market transactions. They ensure that proper checks and examinations are made at every stage of trade and that the company is not misleading or misrepresented. All intermediaries/Players are regulated by SEBI and ensure that they don't engage in any malpractices.