You have learnt the sources of finance being raised through equity shares, debentures, venture capital and lease financing. Security Market is another important source of raising finance. The Securities Market consist of primary market and secondary market. In security market, the securities are bought and sold on the basis of demand and supply of securities. It consists of equity markets, bond markets and derivative markets. It plays a crucial role in the economy. The fund is channelised from savers to investors by the security market. The security market facilitates in the allocation of funds by channelising the fund to the users of the fund. Let us learn them in detail.
Primary Market
In the primary market new securities are issued. It is also known as New Issue Market. Issuers, Government and Corporate issue security in primary market. It helps in raising resources and fulfills the requirement of investment. The securities may be issued at face value, or at a discount/premium value. The securities may be in the form of equity, debt, etc. The market participants may issue the securities in domestic market as well as the international market.
In primary market, the issue is carried out through public issues or private placement. A public issue does not restrict in investing. In private placement, the issue is provided to select people. In terms of the Companies Act, 1956, an issue becomes public if it results in allotment to more than 50 persons. This means an issue of less than 50 persons falls in private placement. There are two types of security issuers.
These are :
(i) Corporate entities, who issue mainly shares, debentures, etc.
(ii) the Government, who mainly issue debt securities like dated securities, treasury bills and others.
The price may reflect information about the issuer and his business. The risk involved in the secondary market may attract the investors in the primary market. There are various ways to raise capital or equity in primary market. These are :
1) Public Issue : In this issue, the securities are sold through IPO.
2) Rights Issue : In this issue, Shares are offered to existing shareholders on pro-rata basis. This facilitates raising of supplementary capital.
3) Private Placement : Securities are sold to high profile investors. These may be Venture Capitalists, Mutual Funds and Banks.
4) Preferential Allotment : Equity shares are issued to selected investors. A listed company issues equity shares which may or may not be in accordance with the market price.
Secondary Market
A market where securities are traded which were initially offered to the public in the primary market and/or listed on the Stock Exchange is known as secondary market. Majority of the trading are preformed in the secondary market. Secondary market consists of equity markets and the debt markets.
The investors or participants trade the already held securities. This is done considering the risk and return.
Secondary market has two components :
(i) The over-the-counter (OTC) market
(ii) exchange-traded market.
The Over the Counter Exchange of India Limited has provided the OTC market. The OTC market are informal markets where trades are negotiated. Most of the trades in Government securities are done in the OTC market. Spot trades are not provided. Cash market is also somewhat like spot market. In cash market, settlement takes place after sometime. Trades takes place over a trading cycle, i.e. a day under rolling settlement. Trades are settled after a two working days. Clearing corporation clears and settles the trades done on the National Stock Exchange of India Limited (NSE). In this way, notation and settlement guarantee are provided. Almost all the trades are settled in DEMAT (dematerialisation) form. NSE also provides a platform for trading of a wide range of debt securities. The Government securities are also traded.
In the Secondary market, the trade may also take place for future date, this is known as forward market. In this market, securities are traded for future delivery and payment. There are two types of forward market i.e. Futures and Options. In future market, standardised securities are traded for future delivery and settlement. These Futures are on an underlying asset i.e. an index or a security or even a commodity. In Options, securities are traded for conditional future delivery. There are two types of Options. These are put and call Options. A Call Options allows the owner to buy a security from the writer of the Option at a predetermined price. A Put Option allows the owner to sell a security to the writer of Options at a predetermined price. These Options also derive their value from underlying security. NSE and the Bombay Stock Exchange (BSE) provide trading of derivatives of securities.
