Primary and Secondary Market

The primary market is where new securities are created and sold for the first time directly to investors. Companies raise fresh capital by issuing equity or debt instruments, and the proceeds go straight to the issuer, enabling expansion, debt repayment or other corporate needs. For the NISM exam, remember that the primary market is also called the new issue market and it is the only place where the issue price is set by the issuer and its lead managers.

Typical instruments in the primary market include Initial Public Offerings (IPOs), Follow‑on Public Offerings (FPOs), Rights Issues, Offer for Sale (OFS) and Private Placements. Each instrument follows a specific regulatory pathway prescribed by SEBI, such as filing a Draft Red Herring Prospectus for an IPO or obtaining shareholder approval for a rights issue. The role of the merchant banker, registrar and transfer agent is to price, market and allocate the securities in compliance with the prospectus.

Exam candidates often confuse the allocation process with the trading process. In the primary market, allocation is done by the issue manager based on a lottery or proportional basis, whereas price discovery happens later in the secondary market. Remember that any profit earned from selling the newly allotted shares is considered a secondary‑market transaction and is subject to capital‑gain tax.

• Issuer – the company raising funds.
• Lead Manager – investment bank that structures and markets the issue.
• Registrar & Transfer Agent (RTA) – handles applications, allotment and share issuance.

Before a security can be offered, the issuer must prepare a prospectus that discloses financials, risk factors and the intended use of proceeds. SEBI reviews the prospectus to ensure fairness and transparency, and any material misstatement can lead to penalties or withdrawal of the issue.

Once the prospectus is approved, the lead manager conducts a road‑show to gauge investor interest and to set the price band. The final issue price is either fixed (for a fixed‑price offer) or determined through a book‑building process where bids are collected and the price is set at the level that maximises subscription.

After the issue is closed, the RTA allocates shares to successful applicants, updates the demat records and releases the proceeds to the issuer. The entire process typically takes 30‑45 days from filing to listing, and each step has specific compliance deadlines under the SEBI (Issue of Capital and Disclosure) Regulations, 2018.

The secondary market is where previously issued securities are bought and sold among investors. It provides liquidity, enables price discovery and allows investors to adjust their portfolios without affecting the issuer’s capital structure. In India, the two major secondary markets are the cash market (equity and debt) and the derivatives market (futures and options) operated by exchanges such as NSE and BSE.

Trading in the secondary market occurs on a recognized stock exchange or over‑the‑counter (OTC) platform, and every trade must be settled through the clearing corporation. The price of a security at any moment reflects the aggregate expectations of all market participants, making it a crucial indicator for portfolio managers.

For the NISM exam, focus on the distinction between primary‑market issuance and secondary‑market trading, the role of brokers, market makers and the concept of bid‑ask spread. Remember that capital gains tax is triggered only when a security is sold in the secondary market, not when it is allotted in the primary market.

Trades are executed through either the order‑driven system or the quote‑driven system. In an order‑driven system, buy and sell orders are matched automatically by the exchange’s matching engine, which is the model used by NSE and BSE. In a quote‑driven system, designated market makers quote bid and ask prices and stand ready to buy or sell, a system more common in OTC markets.

Investors can place market orders, limit orders, stop‑loss orders or good‑til‑canceled (GTC) orders. The choice of order type influences execution certainty and price impact, topics that frequently appear in scenario‑based questions.

After execution, the trade is sent to the clearing corporation for net‑ting and settlement. The current Indian settlement cycle is T+2, meaning the buyer must receive the securities and the seller must receive the funds two business days after the trade date. Failure to settle on time can attract penalties under SEBI’s settlement rules.

Settlement is the final step that transfers ownership of securities from seller to buyer and ensures payment is made. In India, the National Securities Depository Limited (NSDL) and Central Depository Services Limited (CDSL) maintain electronic records, eliminating physical share certificates and reducing settlement risk.

The clearing corporation, such as NSE Clearing Ltd., acts as a central counterparty. It guarantees trade settlement by netting obligations of all participants, thereby reducing the number of payments that need to be made on the settlement date.

Understanding the T+2 cycle is vital for exam questions that ask about the timing of cash flows, tax liability or the impact of delayed settlement. Remember that the settlement date is calculated excluding weekends and public holidays recognised by the exchange.

SEBI is the apex regulator for both primary and secondary markets in India. It issues the Issue of Capital and Disclosure Regulations for primary market offerings and the Securities and Exchange Board of India (Stock Exchanges) Regulations for secondary market operations.

Stock exchanges such as NSE and BSE are self‑regulatory organisations (SRO‑Cs) that enforce listing requirements, monitor trading activity and impose disciplinary actions for market abuse. The exchange’s surveillance team watches for insider trading, price manipulation and other violations.

For the NISM exam, remember the key compliance points: mandatory prospectus filing, adherence to the 30‑day cooling‑off period for IPOs, and the requirement for real‑time trade reporting to the exchange. Failure to comply can result in monetary penalties, suspension of trading rights, or even criminal prosecution.

Read the question carefully to identify whether it refers to a primary‑market activity (e.g., issuance, allotment) or a secondary‑market activity (e.g., trading, settlement). Mis‑classifying the activity is a frequent cause of loss of marks.

Memorise the settlement cycle (T+2) and the regulatory bodies (SEBI, NSE, BSE). Many scenario questions ask you to compute the date of settlement or to point out which authority would intervene in a case of market manipulation.

When a numerical problem involves returns, always use the Holding‑Period Return formula rather than the simple average return. Plug the numbers accurately and verify the final percentage. A quick sanity check – the return should not exceed the price change plus dividend proportionally.

• Remember: Primary market = issuance, Secondary market = trading.
• Always differentiate issue price from listing price.