Accounts Payable Turnover Ratio
Just like accounts receivable turnover ratio show the financing that the firm is providing to its buyers interest free, the accounts payable turnover ratio show the financing that the firm is able to receive from its vendors and suppliers free of cost. Since there are no interest charges involved and this is purely trade credit, […]
The Barnewall Model
The traditional financial theory assumes that all investors are rational. Hence, they believe that all investors will reach the exact same conclusion with regard to investment decisions. However, we see evidence of the opposite happening in the marketplace. Even if different people have the same information, they tend to process the information differently and come […]
Team Sponsorship: Advantages and Disadvantages
In the previous articles, we have already come across the concept of team sponsorship. We have seen how teams can sell different types of sponsorships in order to raise money. This definitely ends up increasing the cash flow as well as the return on investment for the team. It also generally provides a positive return […]
Inverted Yield Curve
Most investors across the world are aware of the fact that yield curves are generally upward sloping. This is because, under normal circumstances, yields for bonds with longer maturities tend to be higher. However, it is possible for the opposite scenario to play out. This means that it is possible for bonds with lower maturities […]
Bootstrapping: Meaning and its Advantages
Modern startup enterprises seem to be focused on the media hype. The focus of the entrepreneurs is to raise enough funds so that they become newsworthy. Once the name of the startup starts appearing in the news, it is considered to be worthy by everyone including other investors, employees, and even customers. Hence, many startup […]
The buying and selling of financial securities is a complex process that has evolved over many years. Each security represents a claim on the financial resources of a firm. The claim could be an equity claim or a debt-related claim.
When a retail investor looks at the stock market, they see only the market where they transact with other investors. However, a lot of investors do not know where the securities come from? In this article, we will explain the concept of primary markets and the issuance of new securities. We will also explain how each stock and bond market is actually intrinsically made up of two markets viz. the primary market and the secondary market. The similarities and differences between the markets have been explained in detail in the article below.
Retail investors are familiar with the process of trading financial securities. However, they do not know much about how these securities come into existence. In order to explain how securities come into existence, we need to explain what a primary market is.
A primary market is a market where transactions happen between the issuing corporations and investors. Let’s understand this with the help of an example. If corporation A wants to raise money by selling stock, they create new securities that represent a claim on their assets. These securities are then sold to retail or institutional investors. The key point to be noted is that the money from the sale of securities goes to the company issuing the securities. Therefore, markets, where securities are created and sold for the first time, are called primary markets. Retail investors seldom participate in primary markets. Earlier, most of these securities would be purchased by investment banks and financial institutions behind closed doors. However, now these securities are sold to the larger group of people via initial public offers.
Once the investor has security, they need not hold it till maturity. In the case of equity stocks, there is no maturity at all! Therefore, the market also allows one investor to sell a security to another investor. In this case, the sale proceeds do not go to the company. Instead, they go to the investor that sold the security. Most retail investors are familiar with the process of transacting in secondary markets. Investment banks are not involved in the functioning of the secondary markets. Instead, brokers and dealers intermediate in this kind of market. The difference between brokers and dealers has been explained in a subsequent article.
The primary market has only one important function. It helps the firm selling securities to raise cash. However, it would be impossible to sell securities in the primary market if the secondary market did not exist. Some of the features of the secondary market have been explained in this article.
To sum it up, each securities market is required to have two subsections viz. the primary market and the secondary market. No market can function if it has only one of these markets. Securities markets require constant inflow of newer securities via the primary market and the provisions for trading them via the security market.
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