Capital market and the primary market

Concept and methods of issue.

Entrepreneurship5 questions
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The essentials

The capital market is the market for medium- and long-term funds. It brings together those who have savings to invest and businesses or governments that need long-term capital. In India, the capital market is regulated by the Securities and Exchange Board of India (SEBI).

The capital market has two parts:

  • Primary market (new issues market): deals with securities issued for the first time. Money flows directly from investors to the issuing company.
  • Secondary market (stock exchange): deals with the buying and selling of securities that have already been issued. Money moves between investors, not to the company.

Key points

Methods of issuing securities in the primary market:

  • Offer through prospectus: the company invites the public to subscribe by issuing a prospectus. A company's first public issue is an initial public offer (IPO).
  • Offer for sale: securities are first sold to intermediaries such as issuing houses or brokers, who then resell them to the public.
  • Private placement: securities are allotted to a small group of selected investors such as institutional investors, which is quicker and cheaper.
  • Rights issue: new shares are offered first to existing shareholders in proportion to their current holding.
  • e-IPO: the issue is made through the online system of a stock exchange.
  • Book building: the issue price is discovered from bids received within a price band, instead of being fixed in advance.
  • Underwriting: an underwriter guarantees to buy any part of the issue not taken up by the public.

Exam tips

  • New securities → primary market; trading of existing securities → secondary market.
  • Existing shareholders get first right → rights issue; a few selected investors → private placement.

Common mistakes

  • Thinking the company receives money when its shares are traded on the stock exchange. It receives money only in the primary market.
  • Confusing rights shares (sold to existing holders) with bonus shares (issued free and raising no new funds).

Practice questions

The market in which securities are issued for the first time is called the:Easy
A company's first offer of shares to the general public is known as:Easy
A company offers new shares to its existing shareholders in proportion to the shares they already hold. This method is …Medium
A start-up company allots shares only to three mutual funds and two insurance companies, without a general public offer…Medium
When Priya buys shares of a listed company from another investor on the stock exchange, which statement is correct?Hard
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