CHAPTER 2B : Market Fundamentals - Types of Capital Market

Primary Markets

The market system where the promoter/promoter group of the company sells his/ their shares for the first time to the public

IPO: Initial Public offer is the process of selling the shares of company from the primary or the initial owner to the public.

• A company can raise funds through 2 modes namely Equity and Debt.
• Hence, when one studies the balance sheet of any company, the capital structure will have two components namely Equity and Debt.
• The market in which the company can raise funds is the primary market.
• In the primary market the transaction of securities is unidirectional i.e. Company sells and the investor buys.
• Suppose the company wants to raise funds through the equity mode, It is usually done through a public issue or an IPO(initial Public offer).
• The companies have to follow a well-established legal procedure and involve a number of intermediaries such as underwriters, brokers, etc. who form an integral part of the primary market.
• The process of an IPO is not important in this training program but it is important to know that the IPO of a company is done through a collaboration with an underwriter(investment banker) and through this collaboration, the company releases a prospectus known as the DRHP (Draft Red herring prospectus).
• In brief the DRHP states all important details of the company like the future prospects, financial valuation, inherent risks, capital structure, future revenue sources, etc.
• These details are extremely important to be disclosed to the public prior to raising funds as mandated by SEBI. This is lieu with the complete disclosure norms set by SEBI to protect investors from fraudulent companies.

Secondary Markets

As the name suggests Secondary Markets is a market place where the trading of Equity share of a company takes place Second time, earlier in primary markets the seller was the Promoter group of the company now here the seller as well as the buyer are investors and the ownership of the share is in public’s domain.

Secondary markets are synonym to Stock exchanges in India as all the Secondary market activity takes place in Stock Exchanges.

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