In the stock market, a share is not a tangible item but represents a unit of ownership in a company. Companies issue shares to raise capital as needed. To trade a security, individuals must engage with a broker or stock exchange. The price of a share fluctuates based on the demand and supply of the stock.
What is share market?
The stock market refers to several exchanges where shares of publicly held companies are bought and sold. These financial activities take place through formal exchanges and marketplaces, all operating under defined regulations. The terms “stock market” and “stock exchange” are often used interchangeably. Traders participate in the stock market by buying or selling shares on exchanges like the Bombay Stock Exchange (BSE) or the National Stock Exchange (NSE).
The share market comprises two primary types: the primary market and the secondary market, each serving distinct roles in the lifecycle of financial instruments like stocks. Here is a brief explanation of each type and their key differences:
Difference between primary markets and secondary markets
Primary Market:
- Definition: The primary market is the initial point of issuance of new securities to the public. It is where companies raise capital by offering shares to investors for the first time.
- Purpose: The primary market allows companies to raise funds for various purposes, such as expansion, research and development, debt repayment, or other strategic initiatives.
Secondary market:
- Definition: The secondary market is where existing securities, previously issued in the primary market, are bought and sold among investors. It is often referred to as the stock market or stock exchange.
- Purpose: Unlike the primary market, the secondary market does not provide funds to the issuing company. Instead, it offers liquidity to existing investors by providing a platform to buy or sell their securities. It also determines the market prices of securities based on supply and demand dynamics.
Key differences
Here are the key differences between the primary and secondary markets:
1. Issuance of securities:
- Primary market: In the primary market, new securities are issued for the first time by companies to raise capital.
- Secondary market: Existing securities, previously issued in the primary market, are traded among investors.
2. Involvement of issuing company:
- Primary market: The issuing company directly interacts with investors, and the process involves underwriters or investment banks.
- Secondary market: The issuing company is not directly involved in the buying and selling of its securities in the secondary market.
3. Source of funds:
- Primary market: Companies raise funds for various purposes, such as expansion, debt repayment, or new projects.
- Secondary market: Funds are not directly provided to the issuing company. Instead, investors trade existing securities among themselves.
4. Role of participants:
- Primary market: Participants include the issuing company, underwriters, and investors participating in the IPO.
- Secondary market: Participants include a diverse range of investors, brokers, and traders buying and selling existing securities.
5. Frequency of transactions:
- Primary market: Transactions occur less frequently as they are tied to the issuance of new securities.
- Secondary market: Transactions are frequent, reflecting the continuous buying and selling of existing securities.
