Where the securities such as shares, bonds, debentures etc. of the company are traded is called stock market. Stock market plays an important role in raising capital of the companies. Companies issuing shares and investors need an intermediary to facilitate the purchase and sale of shares. Such an organization is called stock exchange. Stock exchange helps companies to raise funds from public and financial institutions, and on the other hand, provides security of investment to investors.
The two major U.S. stock markets are the 1) New York Stock Exchange and 2) Nasdaq.
1. Primary Market
The market in which a company’s newly issued securities are sold is called the primary market. In this case, the issuing company receives the money from the sale of shares or securities directly. In the primary market, a company can issue shares in 2 ways:
a) Private Placement
b) Initial Public Offering – IPO
a) Private Placement:- The sale of new shares of the company to a certain number of investors or to a small group of investors is called Private Placement.
In the case of private placement, investors mean institutional investors such as banks, insurance companies, investment companies, merchant banks. In private placement, the investment company helps in finding potential investors, pricing the shares to be issued and setting various terms.
b) Initial Public Offering (IPO):- When a company proposes to sell its shares to the public for the first time, it is called Initial Public Offering or IPO. In this case, merchant banks and underwriters act as intermediaries between the issuing company and investors in the sale of shares. Those who undertake the primary responsibility of selling shares are called underwriters. They advise on the share issues of various companies. As such, it helps determine the price at which each share will be issued.
Some of the leading IPO underwriters in the U.S. include:
-> Goldman Sachs
-> Morgan Stanley
-> JPMorgan Chase
-> Bank of America Merrill Lynch
-> Citigroup
Here’s how underwriters work:
ABC Company has decided to issue 200,000 shares in the market. The face value of each share is $10. Citigroup was appointed as the underwriter. Citigroup buys each share for $9 that will be sold publicly for $10. Citigroup then created sales teams through other merchant banks to sell them at $9.5 each. In this case, Citigroup, the main underwriter, made a profit of $0.5, and the sales team earned $0.5 per share.
2. Secondary Market
It is a market where securities issued in the primary market are bought and sold. After the initial issue of shares by the company, investors can buy and sell the issued shares among themselves through the secondary market. The purpose of the secondary market is to maintain the liquidity of securities while also keeping securities information up-to-date.
The company directly receives the money from the sale of shares in the primary market. But in the secondary market, the money from the sale of shares is traded only among investors.