CHAPTER - 6
Types of stock market
In India, there are two types of the stock market – Primary market & secondary market.
Primary market:
The concept of the share market is simple. The company in need of funds issues its shares (partial ownership) to its investors in exchange for their invested amount. The primary market is where all this takes place.
The company needs funds for various purposes like – to waive off debt, expand the business, operations, starting a new venture, etc. Therefore, the company raises funds from the general public & institutional investors to meet this financial need.
Types of primary market offerings:
1. Initial Public Offer (IPO): It is the first time a private company offers its shares to the public. The company issues Red Herring Prospectus RHP wherein a company provides all the company's information, raising funds, etc. Then, the public applies for an IPO & shares are allotted to the public. After the company is listed on the exchange, the shares are traded in the secondary market.
2. Rights issue: Once the company is listed on the exchange, the shares are traded only in the secondary market. But, through rights issues company can raise additional funds in the primary market by offering the right shares to existing shareholders on a pro-rata basis.
3. Private Placement: Private placements allows companies to raise funds directly from significant investors like banks, mutual funds, etc., without making the shares public.
4. Preferential allotment: In Preferential allotment, shares are offered at a price that is not available to the general public.
Secondary Market:
The secondary market provides a system where stocks issued in the primary market can be traded. The secondary market is further divided into OTC & exchanges. Thus, a secondary market facilitates a platform wherein market participants trade the shares of the companies without any intervention by the companies.
Types of the secondary market:
1. Over-the-counter market (OTC Market)
An OTC market is a decentralized space where investors trade amongst themselves. The risk involved in the OTC market is higher than exchanges as buyer & seller deals on a one-to-one basis.
2. Exchanges
Unlike the OTC market, the buyer & seller do not deal directly with each other. In addition, the exchanges are highly regulated bodies, which makes the exchanges a safer place to transact. However, the transaction cost is high as it includes exchange fees & commission.