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Stock Market: Meaning and Types in India

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“Do you invest in the stock market?” 

“No, I invest in shares.”

This is a common joke that runs in the investor circles. Let us help you gain context (and knowledge) here. 

The stock market is essentially a marketplace where buyers and sellers of securities come together to find each other (and make the trade, influencing supply and demand). Now, can you invest in a market? Technically, not really, but you sure can invest in the shares that are listed on it! 

When you think about it, where are these shares on the market coming from? Let’s quickly walk you over how a stock market functions, which will help you understand the source of the shares, too!

Stock Market – How Does It Work? 

A vital part of India’s financial system, share markets are safe and structured as they are regulated by the Securities and Exchange Board of India (SEBI). This ensures that all activities are fair and ethical, investor interests are protected, and no one (including large players) can manipulate the market to gain unduly. 

Now, this is a broad look at how stocks are traded:

  • A company that needs to raise capital divides its worth into a large but finite number of shares. 
  • It then makes some of these shares available for sale in the stock market. 
  • Investors like us can buy these shares during the company's listing on the stock market, or buy them from other investors who are selling them in the market. 

There, that opened up two possibilities - buy from the company or buy from other traders in the market. These form the basis for the two broad classifications of stock markets that this module is actually about! Let’s dive in!

Stock Market Types 

Stock markets can be of two types, and they both play key roles in India’s financial system:

  • Primary Stock Market 

In this market, companies issue shares or securities for the first time through a stock exchange. This enables investors like you to buy these shares and gain partial ownership of the company while the latter gets to raise the necessary capital. The securities offered might include bills, notes, stocks, or corporate or government bonds. 

The capital can be used to enhance the business’s physical presence, expand its operations, or accomplish other targets. Apart from a company and its investors, an underwriter is involved in these transactions. 

The security issued by a company in the primary market is known as an initial public offering (IPO), and the share price is determined by the underwriter, who is an intermediary between the company and investors.   

  • Secondary Stock Market

In this market, you can buy or sell shares (that are already issued) from or to other investors without the participation of the issuing company. The company’s market performance determines the value of such shares. Participants in the secondary market include retail investors like you, financial intermediaries such as insurance companies, non-banking institutions, banks, and mutual funds, as well as brokers and advisory service providers.    

Close Look at the Primary Stock Market 

Let’s understand the facilities of a primary market, the different types of issues available, and the pros and cons of such a market.

Primary Market - Facilities and Functioning

  • Offer of New Issues – The primary stock market organises offers of new issues or those not previously traded on any exchange. The process involves an in-depth assessment of the company’s business and providing a price band for investors to bid within.  
  • Underwriting Services – Often, a financial institution acts as the underwriter and helps investors gauge the risk associated with buying IPO issues. They might also have to buy all unsold shares, which they can later offer to investors. 
  • New Issue Distribution – When a new issue is made available to the general public for purchase, the distribution process involves disseminating useful information on the issue, the company, and the underwriters.  

Primary Market - Issue Types

  • Public Issue – This is the most common way a company issues its securities to the public and raises the money it needs for expansion, growth, or infrastructure enhancement. The shares are made available for public purchase via IPO when a private company goes public. The liquidity of a company also improves when it trades in an open market.   
  • Private Placement – In this scenario, stocks, bonds, or other securities are offered to a small set of individual or institutional investors. Hedge funds, investment banks, and high-net-worth individuals are mostly targeted. Due to fewer regulatory stipulations, private placements are generally simpler than IPOs, saving time and cost. Moreover, the company can continue to be private. This option is suitable for companies in the early stages or start-ups.  
  • Preferential Issue – It is a quick way to raise capital, as unlisted and listed companies can issue securities or shares to a specific group of investors. Those who own preference shares receive dividends before ordinary shareholders when the time comes. 
  • Rights and Bonus Issues – In this case, a company offers more shares to existing investors at a pre-set price (rights issue) or allots additional free shares (bonus issue). Rights issues involve zero costs and give investors the option to buy stocks at lower prices within a certain period. The company doesn’t benefit from any fresh capital regarding bonus shares. These shares are like gifts for current shareholders. 
  • Qualified Institutional Placement – This is another form of private placement where a company issues shares to a qualified institutional buyer (QIB), an investor with adequate financial expertise and knowledge to navigate the capital market. QIBs might include foreign venture capital investors, foreign institutional investors registered with SEBI, public financial institutions, mutual funds, pension funds, etc. Qualified institutional placement doesn’t involve too many regulations and, hence, is fast and easy.  

Primary Market – Pros  

  • It doesn’t cost companies much to raise capital in this share market. The issued shares ensure high liquidity, too, as they can be immediately sold in the secondary market. 
  • The primary market helps mobilise savings from common people and facilitates investment in channels that can promote wealth creation.
  • The scope of price manipulation is significantly less in the primary market vis-à-vis the secondary market. The manipulation generally happens by inflating or deflating the price of a security, which disrupts free market operations. 
  • The primary market is immune to market fluctuations as stock prices are set during the IPO. This means you know the exact amount you need to invest. 

Primary Market – Cons 

  • Since unlisted companies are outside the purview of SEBI’s mandatory disclosure and regulatory requirements, you might not have enough historical information before investing in an IPO. 
  • Since a company is offering its securities to the general public for the first time, a primary market lacks historical trading data for analysing IPO shares and associated risks. 
  • Investing in the primary market might not always be lucrative for small investors as they might be deprived of share allocation if a share is oversubscribed. 

Close Look at the Secondary Stock Market 

Now, let’s dive into the nitty-gritty of the secondary stock markets, the instruments traded here, the market’s functions and types, and the advantages and disadvantages.  

Secondary Market – Instruments 

  • Fixed income – These are mostly debt instruments, wherein you receive regular payouts in the form of interest and the principal amount on maturity. Debentures, preference shares, and bonds are examples of fixed-income instruments. 
    • Debentures are unsecured and generate returns based on the issuer’s reliability. 
    • In the case of bonds, you enter into a contract with a company or the government. At specific intervals, you receive interest payouts, and on maturity, the principal is repaid. 
    • If you invest in a company’s preference shares, you will receive dividends before equity shareholders.     
  • Variable income – These instruments assure an effective return rate to investors like you, which is determined by multiple market factors. Though the associated risk is high, you can expect good returns, too. Equity and derivatives are examples of such instruments. 
    • As mentioned earlier, equity shares help companies raise funds, and investors enjoy a claim over the company’s net profits. You also have a right to its assets in case the company is liquidated. 
    • Derivatives are contractual obligations that require one party to pay another based on stipulated performance. 
  • Hybrid – As the name indicates, hybrid instruments are formed by combining two or more financial instruments. A good example of such an instrument is convertible debenture. 
    • Convertible debentures are offered as debt securities or loans. After a certain period, they can be converted into equity shares.  

Secondary Market – Facilities and Functioning 

  • As an investor, the secondary share market is your ideal platform to trade in shares, bonds, debentures, and other instruments. 
  • Since this market enables active trading, you can enter transactions any time you want and buy or sell instruments with minimal price variation across transactions. Trading continuity also boosts asset liquidity. 
  • Secondary market is an organised platform to liquidate holdings. You can sell the securities you are holding in multiple stock exchanges. 
  • In any transaction, this market determines an asset’s price based on its supply and demand. Public investors can easily access the information related to transaction pricing and make informed decisions. 
  • The Secondary stock markets not only act as a bridge between savings and investment but also indicate the health of India’s economy.   

Secondary Market – Types 

  • Stock exchange – These are centralised platforms where sellers and buyers don’t need to interact for trading of securities. Examples include the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). Transactions are subject to strict regulations on these platforms, and this ensures almost zero risk for the counterparty. To create such a safe environment, high transaction costs, in the form of exchange fees and commissions, are imposed on investments.  
  • Over-the-counter market – These are decentralised and allow participants to trade among themselves directly. Naturally, the counterparty risk is higher in this case. An example of such a market is FOREX. The price of securities also varies across sellers since the competition for acquiring larger volumes is intense.
  • Auction market – Here, sellers and buyers arrive at an understanding of the rate for trading securities. Pricing-related information, including the offer’s bidding price, is made available to the public.   
  • Dealer market – Here, for a transaction, multiple dealers indicate prices for specific securities. A dealer market mostly trades in bonds and foreign exchange.

Secondary Market – Pros 

  • The secondary market helps you tackle liquidity issues easily. This is because you have access to many buyers for selling your shares and obtaining liquid cash. 
  • This market helps you evaluate a specific company in a proper and fair manner. 
  • Adjustments in security prices happen quickly whenever new information on a company enters the picture. 
  • As an investor, your funds stay mostly secure owing to stringent regulations. 
  • Since your money is held in securities, the secondary market makes savings mobilisation simple.   

Secondary Market – Cons

  • Security prices can be quite volatile, leading to unexpected and sudden losses for you. 
  • Before you purchase or sell securities, you will need to complete the associated procedures correctly, which can take up a lot of time. 
  • Your profit margin as an investor might suffer due to brokerage commissions on every transaction. 
  • Due to many external factors, your investments might be exposed to high risk. 

Primary Market vs Secondary Market 

While both stock market types are crucial to India’s financial system, they are different in multiple ways. To make an informed investment decision and choose a market that is apt for you, knowing the differences is a must: 

Parameters

Primary Market

Secondary Market

Security Issuance 

Securities are issued here initially, after which they are listed for subsequent trading in stock exchanges. 

Securities that have been issued already are traded here.

Issuer Involvement 

Investors directly buy shares from the issuer.

The issuer is not involved as investors directly trade among themselves.

Stock Price

The issue price stays fixed.

Prices change based on demand and supply.

Income Generation 

Selling securities helps the issuer to raise funds.

Investors, and not the issuer, earn through transactions.  

Trading Frequency 

Securities are issued for the first time and once only. 

Same securities are traded repeatedly.

Presence 

It doesn’t have any geographical presence and cannot be linked to any organisational setting. 

Enjoys organisational presence through stock exchanges.

Participants 

Issuing companies, investors, underwriters.

Investors, dealers, brokers. 

Liquidity 

Has low liquidity.

Has high liquidity. 

How To Apply for IPO on Angel One?

  1.  Login to the Angel One App or website and click on ‘IPO’ on the homepage.
  2. Select the IPO you are interested in.
  3. Go through the IPO details like maximum quantity, maximum investment, about the company, etc.
  4. Click on ‘Apply Now’ to apply and enter the number of lots and bidding price along with your UPI ID.
  5. Confirm your bid and accept the payment mandate sent to your UPI App for successfully completing the IPO application.

That’s it! Your IPO order is placed. You can check the status of your IPO in the ‘Order Book’ section.

Now, that sums up this chapter! So, the next time someone asks you, “Do you invest in the stock market?”, you know what to say! Psst: Go ahead, share this module with them, too!

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