Question

(TCO D) Compare and contrast each of the following pairs: a. Primary Market versus Secondary Market b. IPO versus Private Placement c. Stop-Loss Order versus Short Sale

Answer 1

Primary market v/s secondary market

Primary market is said to be primary coz here company offers its shares or security to public for the first time usually through initial public offering. Here the investor buys the shares directly from the company as its first time issued in market and thus the same is called primary market. On the contrary after the shares are being issued its never taken back by the company until it decide to buy back it's shares. In secondary market the initial buyers of shares can sell shares to other buyers and so on. So the company has no involvement in trading of security in secondary market, it's buyer and sellers who buy and sell each other.

IPO vs private placement

Initial public offering or IPO is when a company issues it's securities or shares in the market for the first time. These companies are such which have already fulfilled the criteria of being a public company and listing agreements by security and exchange board. There are a list of norms to be followed before IPO because common people are going to invest in company and as its first time issue the investors may not have any past record about the company and therefore the security exchange board norms are destined to protect investors and help companies to issue their initial public offer. On the contrary as the name suggests private placement is when shares are issues privately or when shares or security are not issued in public rather they are issued to a group of individuals Willing to invest in company. These investor could be directors, employees or past owners of the companies or anyone who would believe to invest in company. Private placement can be initial or further issue and here the company need not to follow guidelines of security and exchange board as well.

Stop loss order vs short sale

And investor is always one who wants to earn from the growth of company in the market but if the company is on the down side it can be harmful for the invest to sustain in continuing loss situation thus an investor sets a price level below which if the price of security is dropped or reached the broker is instructed to sell the security to stop any further loss in that investment. Stop loss are not much relevant for the long term investors but the day to day investors are relieved from the hassle of checking each of their stock continuously by putting an stop loss limit.

Short sale is a strategy where the investor tries to earn from the declining security prices. If an investor has an expectation of decline in security or share in future he can take a selling posting today by selling the shares today with an expectation to decline in price at a point when he will buy them at a lower price and earn the difference as profit. It can also be used as a hedging strategy to avoid stop loss situation if the expectation of decline in security in cash market is combined with a short sale in future market.