09 May 2017

Capital market: Primary Market and Secondary Market

Capital market: Primary Market and Secondary Market

A capital market is a financial market in which long-term debt or equity-backed securities are bought and sold. Capital market is segmented in to two market Primary Market and Secondary Market.

Primary Market

Primary market provides an opportunity to Government and corporations, to raise funds through issue of securities. The securities may be issued in the domestic or international markets, at face value, or at a discount (below their face value) or at a premium (above their face value). The primary market issuance is done either through a public issue or private placement. Under the Companies Act, 1956, an issue is referred to as public, if it results in allotment of securities to 50 investors or more. However, when the issuer makes an issue of securities to a select group of persons not exceeding 49, and if it is neither a rights issue (i.e. issued only to existing investors) nor a public issue (i.e. made available to any member of the general public to invest in), it is called a private placement. When a company makes a public issue of its equity shares for the first time, it is called an initial public offer (IPO). Subsequent issues are Follow-on public offers (FPO).

Secondary Market

Secondary market refers to a market, where securities that are already issued by the Government or corporations, are traded between buyers and sellers of those securities. The securities traded in the secondary market could be in the nature of equity, debt, derivatives etc. It is to be noted that primary market transactions directly affect the issuing company’s balance sheet (i.e. the financial statement of its assets and liabilities as on any date). For instance, if the company issues equity shares, the equity share capital in its balance sheet will increase. On the other hand, a secondary market transactions in those equity shares have no impact on the issuing company’s balance sheet. The ownership of the shares will move from the seller to the buyer .

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