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A stock market is part of the financial market in a nation. A stock market can be defined as a marketplace providing a platform for purchasing or selling stocks of listed companies. Each and every trade takes place following the online trading rules specified by the SEBI (Securities Exchange Board of India) and Reserve Bank of India (RBI). The primary aim of a stock market is to facilitate the fund movement from investors to corporations. Corporations are borrowers in the stock market and in turn, they pay their investors in different forms, like dividends.
Types of Stock Market
Basically, there are two types of stock market that operates under the regulatory regime of the SEBI:
- Primary Stock Market
- Secondary Stock Market
There is another type of stock market, the over-the-counter (OTC) market where buyers and sellers deal with unlisted shares. Transactions are settled between both parties without the intervention of the SEBI, therefore, it is considered riskier than primary and secondary stock markets. But both listed and unlisted shares are reflected in demat accounts. Demat account meaning is a storage for dematerialised financial securities in the stock market.
How the Primary Market Works
In the primary market, new shares of a company float, opening it up for the world for fundraising opportunities. The primary market is also called New-Issue Market (NIM). Companies issue their shares in the primary market via initial public offerings (IPOs) and Follow on Public offerings (FPOs) to raise capital.
- The issuer company offers its new shares or offer for sale (OFS) to the public for the first time through an IPO. It is an initial issue of a company that changes its status from a private entity to a publicly-traded company.
- Talking about a follow-on public offering (FPO), it is the issue of a listed company’s shares on a stock exchange. It is an issue of additional shares of a company after an IPO, thus known as secondary offerings for investors or its existing shareholders.
How the Secondary Market Works
Shares issued in the primary market are listed on stock exchanges, like the Bombay Stock Exchange and National Stock Exchange (NSE) and traded in the secondary market. A secondary stock market is a marketplace to trade already issued or existing shares of companies.
Individuals can approach stock exchanges through a stockbroker only. They need to open a demat and trading account to trade stocks on stock exchanges in the secondary stock market. Stock brokers provide web-based trading platforms and online trading apps also, enabling investors to trade anytime anywhere. A trading account is necessary to access the broker’s trading platform linked to multiple stock exchanges.
How Investors Earn in the Primary Market
Retail investors can apply for an IPO online through a demat account. They need to bid for the IPO lot within the range provided by the issuer company, for example, Rs.110-115 or it can be a fixed price.
- If the applicant receives the IPO allotment, they can sell them for listing gains, following the buy low and sell high strategy. Listing gain is the difference between the listing price of an IPO share on the stock exchange minus the offer price at which the share is allowed.
- Investors with a long-term investment perspective can stay invested in IPO shares for years to grow their capital with the growth of the company.
How Investors Earn in the Secondary Market
- In the secondary market, individuals can invest in securities for dividend income and capital appreciation over a period or trade them in the short-term for quick gains.
- While long-term stock investors can benefit from compounding returns, short-term investors can free up their capital and reutilize it for further trading.
Thus, a stock market comprises primary and secondary markets. Altogether, it reflects how sound an economy is. Individuals can grab investment opportunities in both markets by investing in IPOs or trading listed stocks on public stock exchanges.