1.1. Primary Market
a. A primary market is a market for the new issue of shares, debentures, and bonds, where investors apply directly to the issuer for the allotment and pay application money to the issuer’s account. It is the market where the securities are first issued to the investors.
b. The stocks are generally issued for the first time through an IPO, i.e. initial public offering. However, if the issuer comes back to issue more stocks, it is called a follow-up or secondary offering. But it is still issued through the primary market, as it is the first time these stocks have hit the market.
c. The public offering is the way of raising money directly from the public. The companies take the services of an investment bank to make the public offering and reach out to the investors. The investment banks line up the subscribers and help in the book-building process for the public issue.
An investment bank provides the following services to the companies going for the public issue:
i. Underwriting Offer. Underwriting is effectively the guarantee wherein the underwriter agrees to purchase a certain number of shares in the event the issue is undersubscribed for a certain fee.
The underwriter may also buy the entire issue at a negotiated offering price and subsequently sell the same through an IPO, and make the spread out of this trade. The underwriting offer is also called a bought deal.
ii. Best-Effort Offer. Under this offer, the investment bank acts as a broker only and works on a commission
d. There may also be the private placement of the financial assets. Private placement market financing the direct sale by a public limited company or a private limited company, of its securities (shares and bonds) to a limited number of qualified investors, and are not offered to the public.
e. In the primary market, there is, generally, a direct dealing between the issuer and the investor.
1.2. Secondary Market
a. It is a market where the shares already issued are traded. It is different from the primary market wherein the issuer sells shares directly to the investors.
b. It is the market where there is trade amongst different investors.
c. The secondary market provides liquidity and ensures an efficient primary market. And the secondary markets set the price for secondary offerings.