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Basic Concept of Financial Market

Basic Concept of Financial Market

Concept Of Primary Market

Stock Market its always considered as a market for money makers, in general, you need money to make money in future, but for this, you must know the process ho this can be done, as it’s said:- “money does not grow on trees”.

We all heard this statement since childhood, but does it helps us to make wealth? Somehow it does but we need proper planning and understanding about the terms and concept before we enter into the market.

The term Stock market is defined as a place where buyers & sellers deal in financial securities like shares debentures bonds etc, but before we proceed ahead to let us clear some terminologies which make it easier to understand about the market.

Financial Market:-

A market place where individuals & group of individuals deals in Financial securities, Commodities, Currencies. This financial market is differentiated in as Money market & Capital Market.

Money Market:-

A market which deals in the short term to medium term securities having maturity period up to 1 year.

Capital Market:-

A market which deals in Long term securities having a maturity period of more than 1 year.

Lets us understand what actually Capital Market is:-

A capital market is a market place which deals in long term securities having maturity period more then 1 year, Shares Debentures Bonds etc are some instrument of it, further it is classified as Primary Market & Secondary Market.

Primary Market:-

A primary market is a market place where companies or group promoters decides to expand their business. But for expansion of business, the major requirement is Capital. In the Primary market, companies meet there a requirement of capital generation for the expansion of the business.

How Company generate funds:-

A company after its initial stage of Business expansion requires funds, which a company can use it, use of this fund can be for working capital requirement, for any corporate purpose, clearance of any loan taken earlier etc. In this process of fund generation promoters and a group of promoters of the company offers shares & debenture in return. Issuance of equity it is termed as Equity Financing & issuance of debentures is term as Debt Financing. When a company issue its shares for the first time is termed as Initial Public Offer

Process Involved in generating funds:-

When a company decides to generate funds through Initial Public Offer, first of all, requires to draft a prospectus (a form of the application contains detail information about the company) to SEBI. Once SEBI approves, the company is ready to launch its IPO under which it is offering shares for the first time to investors.

Pricing Method in IPO:-

A company can offer its shares to the public either in fixed-price or in variable pricing method.

When a company offers it shares where the price is fixed and pre-decided is termed as Fixed Price Issue this price is already available in the public domain, Whereas when securities are offered by company where the price is not known only a price range is available in the public domain is termed as Book Building Process. A company can either raise a fund with a fixed price or via Book building process.

Categories of investors:- Major 3 categories are defined by SEBI

  • Qualified institutional Buyers:-

As defined by SEBI Foreign Institutional Investors, Mutual Funds, Insurance Companies, Banks etc are permitted to apply in IPO under the category of QIB, where 50% of the total issue is reserved for them.

  • Non-Institutional Investor:-

As define any person or individual who is registered under the HUF act, HNI, NRI or corporate bodies etc permitted to apply 15% of the total issue

  • Retail Individual:-

Any Individual Resident/ NRI, who is allowed to apply in IPO but not more than Rs 200000/- an are permitted to apply in 35% of the total issue size.

How to apply?

Any individual who wishes to apply in an IPO can use Net Banking, UPI, & Physical application.

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