1. Primary Market vs Secondary Market

Primary Market:

• Definition: The primary market is where securities are issued for the first time. Companies raise capital by issuing new stocks or bonds to investors, typically through an Initial Public Offering (IPO) or a Private Placement.

• Key Features:

  • New Securities: In the primary market, new securities are sold by companies or governments to raise funds for expansion, working capital, or other needs.
  • Issuer-Specific: The issuer (company or government) directly benefits from the funds raised in the primary market.
  • Pricing: The price of securities in the primary market is generally set through various methods, such as fixed price offerings or book-building processes.

• Example: If a company like XYZ Ltd. decides to go public and issue shares for the first time, those shares are sold in the primary market during the IPO. The money raised from the sale goes directly to XYZ Ltd..

Secondary Market:

• Definition: The secondary market is where previously issued securities are bought and sold among investors. This is the market we typically refer to when talking about stock trading on exchanges like the NSE or BSE.

• Key Features:

  • Resale of Securities: In the secondary market, securities are traded between investors, with no direct involvement of the issuing company.
  • Liquidity: It provides liquidity to investors, as they can sell their securities to other market participants whenever they wish.
  • Price Determination: The price of securities in the secondary market is determined by supply and demand, and it fluctuates based on market sentiment, news, and other factors.

• Example: After XYZ Ltd. has issued shares in the primary market (IPO), those shares can then be bought and sold by investors on the NSE or BSE. The trading that happens on these exchanges is part of the secondary market.

2. IPOs (Initial Public Offerings)

• Definition: An Initial Public Offering (IPO) is the process by which a privately owned company offers its shares to the public for the first time. It marks the transition of a company from a private to a public entity.

• Key Features:

  • Capital Raising: IPOs help companies raise capital from the public to fund business expansion, pay off debt, or invest in new projects.
  • Underwriters: Investment banks or financial institutions act as underwriters, helping the company price the shares, sell them, and ensure that the process is compliant with regulations.
  • Public Listing: Once the IPO is completed, the company’s shares are listed on a stock exchange, allowing them to be traded in the secondary market.

• Process:

  1. Preparation: The company prepares its financial statements and gets approval from regulators like SEBI in India.
  2. Price Determination: The company and underwriters decide the price of shares based on factors like market conditions and investor interest.
  3. Public Offering: Shares are offered to the public through a subscription process.
  4. Listing: After the IPO is concluded, the company’s shares are listed on the stock exchange and start trading.

• Example: The IPO of Zomato in 2021, where the company offered its shares to the public for the first time to raise capital for growth.

3. Overview of Market Instruments: Cash Stocks, Derivatives, Futures, Options, and More

Cash Stocks (Equities):

• Definition: Cash stocks refer to the buying and selling of actual shares of companies, where the investor owns a stake in the company.

• Key Features:

  • Ownership: When you buy cash stocks, you become a shareholder and have rights like voting at AGMs and receiving dividends (if applicable).
  • Short-Term and Long-Term: Investors can hold stocks for short-term trading or long-term investment.
  • Pricing: Prices are determined by market forces in the secondary market.

• Example: Buying 100 shares of Reliance Industries Ltd. is a cash stock transaction where you own a direct stake in the company.

Derivatives:

• Definition: Derivatives are financial instruments whose value is derived from the price of an underlying asset, such as stocks, bonds, commodities, or indices.

• Key Features:

  • Hedging and Speculation: Investors use derivatives to hedge risk (protect themselves from price fluctuations) or speculate (bet on price movements).
  • No Ownership: Derivatives do not provide ownership in the underlying asset; instead, they provide a right to buy or sell that asset in the future.

• Types of Derivatives:

  1. Futures: A contract to buy or sell an asset at a predetermined price on a future date.
  2. Options: A contract that gives the holder the right (but not the obligation) to buy or sell an asset at a specified price before a certain date.

Futures:

• Definition: Futures are standardized contracts that obligate the buyer to purchase, and the seller to sell, an asset at a predetermined price on a specified future date.

• Key Features:

  • Obligation: Unlike options, futures contracts oblige both the buyer and the seller to fulfill the contract at maturity.
  • Hedging and Speculation: Futures are used for hedging against price movements or for speculative purposes.

• Example: A futures contract on crude oil allows an investor to agree to buy crude oil at a certain price on a specific date in the future, based on market expectations.

Options:

• Definition: Options are contracts that give the holder the right, but not the obligation, to buy or sell an underlying asset at a set price before a specified expiration date.

• Key Features:

  • Call Options: Gives the holder the right to buy the underlying asset at a set price.
  • Put Options: Gives the holder the right to sell the underlying asset at a set price.
  • Premium: The price paid to acquire an option is called the premium.

• Example: Buying a call option on Tesla stock gives you the right to buy Tesla shares at a fixed price within a certain period.

Other Market Instruments:

• Bonds: Debt securities issued by companies or governments that pay interest and return the principal at maturity.
• ETFs (Exchange-Traded Funds): A type of fund that holds a collection of assets (stocks, bonds, commodities) and is traded on stock exchanges like individual securities.
• REITs (Real Estate Investment Trusts): Companies that own, operate, or finance real estate properties and allow investors to buy shares in real estate portfolios.

In summary, the stock market has various instruments and markets to facilitate different investment strategies:

• Primary Market for raising capital through new securities, while the Secondary Market enables the buying and selling of existing securities.
• IPOs are an important method for companies to raise capital from the public for the first time.
• Market Instruments like cash stocks, derivatives (futures, options), bonds, and ETFs offer investors a wide range of opportunities for growth, hedging, and diversification.