How does the stock market in India operate? To understand, you must have a clear idea of the different types of share market. These differ based on the stage of the transaction and the classification of stocks. As a stock market investor, knowing how the markets work is crucial. It will help you to navigate the capital markets with greater ease.
Primary market
Shares are first issued on the primary market. For instance, a firm may initiate an initial public offering (IPO) on the primary market by floating shares to the public. This represents the first opportunity that investors have to purchase stocks in the newly launched company. Investors can now purchase the securities directly from the issuing party.
A company whose shares already trade on the stock exchange can issue additional shares through a rights offering. Once again, the new shares are issued in the primary market and investors can buy these from the issuer.
Secondary market
After the new shares have been allotted to investors, whether through an IPO or a rights issue, all further transactions move to the secondary market, which is also known as the stock exchange. The Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) are examples of secondary markets.Here, traders can buy and sell shares from the shareholders. The original issuers of the securities—the companies behind the IPO and the rights issue—are not involved in these subsequent transactions on the secondary market.
There is a further subdivision within the secondary market into the auction market and the dealer market:
- Auction
market:The prices here depend on the lowest price
that a seller is willing to accept (ask price) and the highest price that a
buyer is willing to pay (bid price). Thus, all participants publicly declare
the prices that are acceptable to them. Matching bids and asks are linked to
facilitate the transactions.
- Dealer market: Here,the dealers act as so-called ‘market makers’. Each dealer posts their selling or buying price for all market participants to see. Their aim is to compete with other dealers by providing the best prices in the market.
Further market classifications
The securities traded have an effect on the types of share market categories too. Thus, there are also the following market segments:
- Equitymarket: This is part of the cash segment. When a buyer places their order, the transaction is executed at the corresponding ask price in the seller’s market. The deal could be closed at the stated price or the best available price. The buyer pays the entire value of the equity stocks purchased.
- Derivatives market: Trades here take place through futures and options contracts, with stocks being traded in lots. The lot size depends on the valuation of each stock. A futures contract obliges you to close the order within a specific date and at a specified rate. If you take out an options contract, you can usually choose whether to execute or ignore the order.
Final word
Knowledge of the overall market structure is useful for understanding how securities are traded. Individual investors certainly benefit from organised secondary markets. You can easily access multitudes of stocks and traders. It is also important to open an account with a broker like Kotak Securities that provides market data, analysis, and alerts in real-time. Once you have all the information in hand, figuring out your plan of action becomes simpler and more efficient.