Question

What is the difference between a primary market and a secondary market? Provide examples of well-known markets and categorize them appropriately. What are several examples of different types of indices, and what do they measure?

Answer 1

The Capital Market has two interdependent segments, the new issues (primary market) and the stock (secondary) Market.

Primary Market:

The primary market provides the channel for sale of new securities, while the secondary market deals in securities previously issued. The issuer of securities sells the securities in the primary market to raise funds for investment and/or to discharge some obligation.

                       In other words, the market wherein resources are mobilised by companies through issue of new securities is called the primary market. These resources are required for new projects as well as for existing projects with a view to expansion, modernisation, diversification and upgradation.

                      The Primary Market (New Issues) is of great significance to the economy of a country. It is through the primary market that funds flow for productive purposes from investors to entrepreneurs. The latter use the funds for creating new products and rendering services to customers in The country and abroad. The strength of the economy of a country is gauged by the activities of the Stock Exchanges. The primary market creates and offers merchandise for the secondary market.

Secondary Market:

The secondary market enables those who hold securities to adjust their holdings in response to changes in their assessment of risk and return. They also sell securities for cash to meet their liquidity needs. The price signals, which subsume all information about the issuer and his business including associated risk generated in the secondary market, help the primary market in the allocation of funds.

       A Secondary market essentially comprises of stock exchanges which provide the platform for purchase and sale of securities by investors. The trading platform of stock exchanges are accessible only through brokers and trading of securities is confined only to stock exchanges.

The stock market or secondary market ensures free marketability, negotiability and, price discharge. For these reasons the stock market is referred to as the nerve center of the capital market, reflecting the economic trend as well as the hopes, aspirations and, apprehensions of the investors.

       This secondary market has further two components, First, the spot market where securities are traded for immediate delivery and payment, The other is the futures market where the securities are traded for future delivery and payment. Another variant is the options market where securities are traded for conditional future delivery. Generally, two types of options are traded in the options market. A put option permits the owner to sell a security to the writer of the option at a pre-determined price before a certain date, while a call option permits the buyer to purchase a security from the writer of the option at a particular price before a certain date.

Categories of Market:

Primary Market:

Initial Public Offer(IPO): When a company first time issues shares to the Public, the issue is called IPO.

Further Public Offer(FPO): When a already listed company further raises money from public, the issue is called FPO.

Right Issue: When company issues shares to it's existing shareholders by giving them a right to subscribe to the shares in such issue , the issue is called Right Issue.

Further Public Offer(FPO)

Secondary : In secondary market shares of a Public Listed Company are traded on a stock exchange. Some famous stock exchanges in the world are as follows:

New York Stock Exchange (US

NASDAQ(US)

Japan Exchange Group(Japan)

Shanghai Stock Exchange(China)

Bombay Stock Exchange(India)

Types of Indices:

Global Indices: These are for entire continent. for example S&P Latin, America 40.

Natiional Indices: These are for a particularcountry for example SENSEX and NIFTY for India.

Sectoral Indices: For a particular sector in a country. For example BSE BANKEX   which tracks top banking companies in India.

For any other theme/group of economy/companies for example Dow Jones Islamic world market index.

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