The main components of capital market are:
1. Primary Market
2. Secondary Market
Primary market refers to the market
where securities are created, while the secondary market is one in which they
are traded among investors.
Knowing how the primary and secondary
markets work is key to understanding how stocks trade.
Primary market- (NEW
ISSUE MARKET)
The primary market is the part of the
capital market that deals with issuing of new securities. Primary markets
create long term instruments through which corporate entities raise funds from
the capital market.
In a primary market, companies,
governments or public sector institutions can raise funds through bond issues
and corporations can raise capital through the sale of new stock through an
initial public offering (IPO).
The process of selling new shares to
investors is called underwriting.
The main features of primary markets
are:
· This
is the market for new long term equity capital. The primary market is the
market where the securities are sold for the first time. Therefore, it is also
called the new issue market (NIM).
· In
a primary issue, the securities are issued by the company directly to
investors.
· The
company receives the money and issues new security certificates to the
investors.
· Primary
issues are used by companies for the purpose of setting up new business or for
expanding or modernizing the existing business.
· The
primary market performs the crucial function of facilitating capital formation
in the economy.
· The
new issue market does not include certain other sources of new long term
external finance, such as loans from financial institutions. Borrowers in the
new issue market may be raising capital for converting private capital into
public capital; this is known as "going public."
2. Secondary Market (Stock
Exchange):
Little long
paragraph, but read it, you can easily write everything related like features,
characteristics difference etc.
The
secondary market is the market for the sale and purchase of previously issued
or second hand securities.
In
secondary market securities are not directly issued by the company to
investors. The securities are sold by existing investors to other investors.
Sometimes the investor is in need of cash and another investor wants to buy the
shares of the company as he could not get directly from company. Then both the
investors can meet in secondary market and exchange securities for cash through
intermediary called broker.
In secondary market companies get no
additional capital as securities are bought and sold between investors only so
directly there is no capital formation but secondary market indirectly
contributes in capital formation by providing liquidity to securities of the
company.
If there is no secondary market then investors
could get back their investment only after redemption period is over or when
company gets dissolved which means investment will be blocked for a long period
of time but with the presence of secondary market, the investors can convert
their securities into cash whenever they want and it also gives chance to
investors to make profit as securities are bought and sold at market price
which is generally more than the original price of the securities.
This
liquidity offered by secondary market encourages even those investors to invest
in securities who want to invest for small period of time as there is option of
selling securities at their convenience.
