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Chapter 4- Types of Stock Market

Updated: Apr 10, 2021

There are two kinds of share markets namely the Primary and Secondary Markets. So let’s talk about these in details: -

  • Primary Market – Primary market is where securities are generated. The best example of a primary market is IPO (Initial Public Offering). When a company publicly sells new stocks and bonds for the first time to the general public for raising funds to fulfill the long-term capital requirement, it does so in the primary market.

  • Secondary Market – It is one in which those securities are traded among the shareholders. It is the stock market and refers to the Bombay Stock Exchange, National Stock Exchange. In this, the securities which were issued a while ago trade by the investors without the companies’ involvement. For example, if we are buying 100 shares of Reliance, then we are trading only with another investor who owns a share in Reliance. Reliance is not directly touched with the transaction.

There are a few terminologies that are associated with the Primary and Secondary market. These are: -

IPO (Initial Public Offering) – When a company wants to raise fresh capital to grow in their business, they offer some shares to the general public. The public will take to the shares by paying some amount of money. Because the company is publishing the shares to the public for the first time, it is called an Initial Public Offering. There are many IPO that came as MTAR, EaseMyTrip, etc.

Before IPO, the company has to submit DRHP (Draft Red Herring Prospectus) after getting the initial SEBI approval. This DRHP comprises all the details about that company like financial statements, the estimated size of the IPO, Risk involved in the business, Management details.

FPO (Follow-on Public Offering) – It begins after the Initial Public Offering. It is done once the company is listed on the exchange to take up additional capital for their business. But it has a different tool for applying and allotting the shares. For example, Yes Bank announced to raise Rs. 15000 crore through FPO.

It is 2 types: -

  1. Dilutive FPO – It is when the company wants to turn out more shares to collect more funds. It is done by the company to pay off the debt. EPS will decrease as the number of shares increased.

  2. Non-dilutive FPO – In this, no new shares are issued. So EPS will remain unchanged. In this, the promoters turn out some of the shares to the public. The shares issued in this are those that are already in existence. It does not pass any benefit to the company but it is done to change the ownership pattern.

Rights Issue – It is given to the existing shareholders. Promoters want to hike additional capital from existing shareholders by issuing them new shares at a discounted price lower than the market price. It is not forced to buy it from the shareholders. 1:4 rights issue means every 4 shares retained 1 additional share is offered.

OFS (Offer for Sale) – It is a method where a company’s promoters can sell their shares and decreased their holdings through the bidding platform. They dilute their stakes in the company by selling their shares on the exchange platform.

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