It is very important for a new investor to gain a good knowledge of the different kinds of financial markets for effective trading. At a macro-level, financial markets can be of 2 kinds:
1. Money Market: Here the securities traded should pay off in a short span, for example in less than 1 year. These markets generally deal in treasury bills, commercial papers, bankers' acceptance, certificates of deposits, etc., which pay off in the short term.
Market
2. Capital Market: Here long-term equities and shares are issued and traded. Capital markets are where most of the traffic of trading occurs. Capital market are sub-divided into
a. Primary Market
b. Secondary Market
In primary markets, new securities are traded for the first time. Companies, government, or public sector units (PSUs) can issue securities in this market through Initial public offerings (IPOs), rights issue (for existing companies), and preferential issue. The process of underwriting or issuing new bonds to investors is done through the help of a securities dealer. The commission of these dealers is based on the price of the security offering.
Another name for the primary market is the New Issue Market (NIM) as here securities are sold for the first time. This also encourages long-term capital investment. The companies in this market can issue security directly to the investor and earn the money out of it. Companies new to the market or thinking of expansion usually generate capital for themselves by issuing securities in this market. The assets sold in the primary market can only be redeemed by the original holder as a disadvantage.
Contrary to the popular belief that primary market is not for small investors, it can be quite safe an option for them in the wake of the demat scam in which a big investor showcased as a small investor and squandered money. Mutual funds investing in IPOs and Follow-up Public Offers (FPOs) are also being sought after by small investors.
However, the fact remains that most of the trading still occurs in secondary markets. In a secondary market, securities that are traded have been already offered to public in a primary market and listed in an exchange, such as the NYSE. The securities that can be traded in the secondary markets include equity shares, bonds, etc. Trading in this kind of a market is done through a stock broker.
In order to comply with the regulations laid down by the Sarbanes-Oxley Act, private secondary markets have been formed. Institutional or accredited investors use these markets for trading of unregistered and private securities.
Primary and Secondary Market
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