The Financial Market or Capital Market is a place where capital is raised by selling bonds, stocks and other sorts of investments. You will find various types of financial products here, catering to a wide range of price brackets. There are two types of Capital Markets where trade occurs – the Primary Market and the Secondary Market. Understanding how these two distinct markets work is crucial to trading in stocks and bonds. We take a closer look at what happens in these two markets in this article:
Investing through the Primary Market
When a company decides to sell stocks or bonds of his company to the public for the first time, the sale occurs in the Primary Market. This new sale is called an Initial Public Offering or IPO. All issues are strictly regulated by the SEBI and must be approved by them before being issued. These companies usually have a team of investment bankers who help them sell to large investors. Prices in the Primary Market are usually low as demand cannot be predicted. As an investor, this will be the first chance to invest in the bonds or shares of the company.
Companies can also raise capital through Private Placement and Preferential Allotment. Private Placement is when companies make the investment open only to large private institutions, hedge funds or banks. These issues will not be open to the public. Similarly, Preferential Allotment is offered to a select list of large investors at a special price different from that offered to the general public.
The trading in this market happens directly with the issuing company.
Investing through the Secondary Market
The Secondary Market is for trading in financial securities after they’ve been sold on the Primary Market. Unlike the Primary Market, in this market investors trade among themselves. Here the issuing company is not involved. This is especially useful for bondholders who can sell their bonds for a profit if interest rates are lower than the coupon rate offered by the issuing company. Initially, the sale of Bonds occurred through the OTC Market or Over-the-Counter, where trading was handled by dealers and not in a single location. However, with increased regulations coming into place, this method is fast diminishing and trading in bonds is becoming transparent and simple.
As an investor, you should do your own research about the company you plan to invest in, their history and growth potential. Basis this, you need to take an educated call on investing in their particular bonds or stocks.