The Indian stock market is the second largest and most vibrant financial market in the world. It contributes a lot to the economic development of the country since it enables companies to raise funds and investors to buy or sell financial instruments. This makes it crucial for anyone who wants to trade, invest or simply knows the economy better to appreciate the various markets that exist within the Indian stock market.
This blog will look at the different types of markets that characterize the Indian stock market, focusing on exchanges, market structure, and types of securities.
1. Primary Market (New Issue Market)
The primary market, or the New Issue Market (NIM), refers to that part of the capital market that facilitates the issuance of securities by providing funds to the company for the very first time for the issuance of new securities, shares or bonds. This part of the market acts as a source for companies in need of money for growing their operations, paying off debts, or other such activities of the business.
Below are some highlights:
Initial Public Offering (IPO): Companies can enter the primary market in the simplest form by means of an IPO which stands for an Initial Public Offering. In this way, a corporation is allowed to offer its stocks to the public for the very first time and hence transforms from a privately held firm to that of a publicly held firm.
Follow-on Public Offer (FPO): This seeks to mean sale of further shares of the already listed company. This enables companies to finance themselves even after the initial public offer has taken place.
Private Placements: These are efforts to sell securities only to a few accredited or institutional investors and not the general public.
Process:
Underwriting: Investment banks, or underwriters help companies determine the pricing of the securities and help in the issue process.
Subscription: The Investor may apply for New Shares or Bonds through the offering, generally at a fixed price.
Listing: After the issue is over-subscribed then the securities are listed in certain stock exchanges for example Bombay Stock Exchange (BSE) or National Stock Exchange (NSE).
Importance to the Indian Economy:
The primary market is very important as it helps in capital formation which gives an opportunity for corporations to raise money towards projects, pay salaries to the employees and promote growth. In other markets apart from equity, the market for IPOs in particular has raised to be a major source of income as more and more young technology based companies have gone public.
2. Secondary Market
The secondary market is the market in which the securities issued already in the primary market are traded. In contrast to the primary market, where new capital is raised by the issuance of fresh shares, the secondary market does not require raising additional capital by means of selling new shares but purchasing existing shares furnished by other investors.
Key Features:
Liquidity: The secondary market allows investors to convert their investments into cash by buying or selling their holdings at market prices. Consequently, entering as well as exiting a particular stock would not constitute a problem for the investor.
Price Discovery: It is also the market, which determines the foreseeable values of equities and other financial instruments based on demand and supply.
Stock Exchanges: For the most part, Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) are the most regularly used stock exchanges in India. They allow investors to buy and sell stocks, bonds, derivatives and other financial instruments.
Types of Secondary Markets:
Equity Market: This entails the transactions that happen when company stocks or shares are bought and sold. Speculators place trades based on company performance, the general economic health, and other internal factors.
Debt Market: This refers to the market in which policies such as the government bonds, corporate bonds and any other steady earnings instruments are purchases and sold. debt market plays an important role in ensuring the government or any business enterprise completes its project.
Derivatives Market: This encompasses the trading of contracts such as futures and options, that are based on underlying assets such as shares commodities or indexes.
Popular Stock Indices:
Sensex: The Sensex is the index of the BSE against which the performance of vision funds is measured. It comprises of large-cap companies of further regions (30 performance).
Nifty 50: It is an index of the National Stock Exchange comprising of 50 large –cap companies which are listed in that exchanges
3. Money Market
Key Features:
Instruments: Every money market instrument is usually of a very short tenor and therefore the availability of the instruments and the existences of the market is quite useful due largely to the low term and repayment of short term securities such as treasury bills, commercial papers, data certificates and time deposits, repos, and other redemption instruments.
Low Risk: For all such reasons, the instruments in the money market are available to the investors only for short periods and are made available by institutions rated AAA or by the government or other blue chips firms, hence this class of investment is considered to be with very low risk.
Regulation: The money market in India is regulated and controlled by the Reserve Bank of India according to some rules designed to assist in the proper control of the liquidity management and interest rates.
Importance to the Indian Economy:
Further the money market also has an economic importance of aiding economies flexibility and stability- it eliminates the risk of funds being idle by equipping the institutions that have them with ways of dealing with a short term deficit or excess of cash available to them. It also limits the assistance of the central bank in the Course of Implementing Its Monetary Policy. However this is done through
4. Marketplace for derivatives
Within the realm of finance, a derivative refers to a contract whose value is determined relative to an underlying asset, including stocks, bonds, or commodities among other tangible market indices. Most of the normal activities in this space involve dealing in contracts referred to as options and futures.
Key Features:
Futures Contracts: A futures contract refers to a legally binding agreement to buy or sell an asset on a specified future date at an agreed price. Most of these contracts are entered into for either speculation or hedging purposes.
Options Contracts: An options contract allows the owner, during a specific time-frame, the right but not the obligation to buy or sell an asset at a specified price.
Hedging and Speculation: Price derivative instruments make it possible for the investor to either mitigate his or her exposure to price volatility or optimize the returns by even further extending the exposure to price movements.
Popular Portals for Derivatives Trading:
NSE: NSE continues to be the primary exchange for derivatives trading in India with introduction of individual stock option & index level Nifty & Bank Nifty futures & options trading.
Significance with respect to India:
The derivatives markets are, to say the least, indispensable when it comes to any risk management which in turn provides protection to the enterprises and the investors themselves from the risks associated with price fluctuations of the underlying assets. Especially considering the need to manage such risks in order to maintain the stability of the economy.
5. The Foreign Exchange Market (Forex)
Foreign exchange, simplified as (forex), is the global marketplace for the exchanging of currencies in different countries. As for Indian forex exchange Ibrahim’s primary concern is the currency value of the substantially Indian Rupee (INR) against the US Dollar (USD), Euro (EUR), Japanese YEN (JPY) and other rates.
Main Features:
Transacting in currency: Foreign exchange is a market where one trades national funds, which means people within or outside the country (even the governments) can buy and sell currencies for purposes of international trade and business ventures.
Cash and Non-Cash Transactions: Foreign exchange market, apart from cash transactions which allow immediate transfer of currencies, also involves non cash transaction in which forex market forwards, futures and options markets are included.
Economic Significance of the Forex Market
Apart from these, the forex market eases international trade and investment by allowing different currencies to be exchanged. Therefore, the Indian economy and the second one is the market for currency and for the balance in monetary compensation or in other words improving and maintaining the foreign exchange market is very essential.
6. The Over-the-counter (OTC) market
Over-the-Counter (OTC) means the transactions are not made through any intermediation of any exchange and held with two parties directly, instead.
Salient Features:
No Exchange Required: OTC securities are purchased and sold without the use of an exchange, primarily via brokers and or dealers.
Regulatory Disparity: In comparison to trade exchanges, smaller parts of the regulatory framework to the operation of OTC markets result in their being somewhat opaque.
Relevance to the Indian Economy –
OTC Markets are beneficial in that they provide an opportunity to the investors to trade stocks, shares and other instruments which are not available in organized exchanges. It helps the market in providing circulating capital to the equity instruments which are available in very low volumes in stock exchanges.