The financial market plays a very important role in the economic development of a country. It helps in mobilising savings and channelising them into productive investments. In India, the capital market is broadly divided into the primary market and the secondary market. Stock exchanges act as organised platforms for trading securities in the secondary market.
Primary Market
The primary market is the market where new securities are issued for the first time. It is also known as the new issue market (NIM). Through the primary market, companies, governments, and public sector institutions raise fresh capital directly from investors.
In this market, funds flow directly from investors to the issuer. The securities issued in the primary market create new financial assets and add to the capital formation of the economy. Once securities are issued in the primary market, they can be traded later in the secondary market.
Objectives of the Primary Market
The primary market helps companies raise funds for starting new projects, expansion, modernisation, or repayment of old debts. It also provides investors an opportunity to invest in new companies or new issues at an early stage. From the economy’s point of view, the primary market promotes savings and supports long-term economic growth.
Instruments Issued in the Primary Market
In the Indian primary market, different types of securities are issued. These include equity shares, preference shares, debentures, bonds, and units of mutual funds. Government securities and treasury bills are also issued through the primary market, mainly through auctions conducted by the RBI.
Methods of Issue in the Primary Market
Companies can raise funds in the primary market through various methods:
- Public Issue (IPO / FPO): Securities are offered to the general public through a prospectus.
- Private Placement: Securities are sold to a selected group of investors.
- Rights Issue: Shares are offered to existing shareholders in proportion to their holdings.
- Bonus Issue: Free shares are issued to existing shareholders out of reserves.
Among these, Initial Public Offer (IPO) is the most common method for companies entering the capital market for the first time.
Role of Intermediaries in the Primary Market
Several intermediaries play an important role in the primary market. These include merchant bankers, underwriters, registrars, brokers, and bankers to the issue. They help in pricing, marketing, allotment, and settlement of securities. The functioning of the primary market is regulated by SEBI, which ensures investor protection and fair practices.
Secondary Market
The secondary market is the market where existing securities are bought and sold. Unlike the primary market, no new securities are created here. Instead, ownership of securities is transferred from one investor to another.
The secondary market provides liquidity to investors by enabling them to convert their investments into cash whenever required. It also helps in continuous price discovery of securities based on demand and supply.
Importance of the Secondary Market
The secondary market is essential for the success of the primary market. Investors are willing to invest in new issues only if they know that they can easily sell their securities later. The secondary market also helps in assessing the performance of companies through share price movements.
For banks and financial institutions, the secondary market plays a crucial role in portfolio management and liquidity management.
Functions of the Secondary Market
The secondary market performs several important functions. It provides liquidity and marketability to securities, ensures continuous pricing, encourages investment by reducing risk, and helps in efficient allocation of capital. It also reflects the economic and financial health of companies and the economy as a whole.
Difference Between Primary Market and Secondary Market
The primary market deals with the issue of new securities, while the secondary market deals with the trading of existing securities. In the primary market, funds flow from investors to the issuing company. In the secondary market, funds move between investors only. Prices in the primary market are fixed or discovered during the issue process, whereas prices in the secondary market fluctuate continuously based on market conditions.
Stock Exchanges in India
A stock exchange is an organised and regulated market where securities such as shares, debentures, bonds, and derivatives are traded. Stock exchanges provide a transparent, secure, and efficient platform for trading.
In India, stock exchanges are regulated by the Securities and Exchange Board of India (SEBI) under the SEBI Act, 1992.
Major Stock Exchanges in India
India has two major national-level stock exchanges:
- Bombay Stock Exchange (BSE)
- National Stock Exchange (NSE)
The BSE is the oldest stock exchange in Asia, while the NSE introduced electronic trading in India and revolutionised the capital market.
Bombay Stock Exchange (BSE)
The BSE was established in 1875 and is located in Mumbai. Its benchmark index is the Sensex, which represents 30 well-established companies across various sectors. The BSE provides trading in equities, debt instruments, mutual funds, and derivatives.
National Stock Exchange (NSE)
The NSE was established in 1992 and started operations in 1994. It introduced a fully automated, screen-based trading system. The benchmark index of NSE is the Nifty 50, which represents 50 large and liquid companies. NSE has significantly improved transparency and efficiency in the Indian stock market.
Functions of Stock Exchanges
Stock exchanges perform several important functions in the financial system. They provide liquidity to securities, ensure fair price discovery, promote transparency, protect investors, and encourage corporate governance. Stock exchanges also act as a barometer of the economy, as market movements reflect economic trends.
Trading Mechanism in Stock Exchanges
Trading in Indian stock exchanges is done through an electronic, order-driven system. Investors place buy and sell orders through registered stock brokers. Trades are matched automatically based on price and time priority.
Settlement of trades is done through clearing corporations on a T+1 or T+2 basis, depending on the type of security, ensuring quick and secure transfer of funds and securities.
Role of SEBI in Capital Market
SEBI is the regulatory authority for the capital market in India. It regulates stock exchanges, intermediaries, and market participants. SEBI aims to protect investor interests, promote market development, and ensure fair and transparent practices.
Importance of Capital Market for Banks
For banks, the capital market provides investment opportunities in equity and debt instruments. Banks also act as intermediaries in IPOs, custodians, and clearing members. Stock market movements influence banks’ treasury operations, portfolio valuation, and overall financial stability.
Conclusion
The primary market, secondary market, and stock exchanges together form the backbone of the Indian capital market. The primary market helps in raising fresh capital, the secondary market provides liquidity and price discovery, and stock exchanges ensure smooth and transparent trading.