In today’s fast-paced financial world the share market stands as a crucial pillar for economic growth and individual wealth creation. Understanding how it works and its different types is essential for making informed investment decisions. Whether you are new to investing or experienced knowing the basics of the share market can enhance your strategy.
This article guides you through the fundamentals of the share market, its different types, including the primary and secondary markets, and how they function.
What is the Share Market?
The share market, also known as the stock market or equity market, is a platform where individuals and institutions buy and sell shares of publicly traded companies. This marketplace plays a vital role in the economy by facilitating capital raising for businesses and providing investors with opportunities to earn returns on their investments. Understanding the various types of share markets is essential for anyone looking to engage in stock trading or investment.
Types of Share Market
The share market is broadly divided into two main types, each offering unique features and benefits for investors and shareholders. In addition to these, other types of markets also exist, catering to various investment strategies and needs.
Primary Market
The Primary market is a place where companies sell new shares and bonds to raise money from investors. It is where securities are created. It allows companies to raise funds directly from investors to expand, pay off debt, or for the company’s day-to-day operation. Companies issue modern stocks and bonds to the public for the first time through IPOs.
For example: Imagine you want to open a toy business but don’t have enough capital to expand. So, the primary market is a place where you offer your company shares to the public to raise capital. It is just like asking for money to start or grow your business promising that you will pay back to the shareholders.
Key Features of the Primary Market:
- Companies issue new stocks and bonds to investors for the first time.
- The process includes initial public offerings and follow-on public offerings.
- Funds are raised for operations, expansion, debt, or other corporate purposes.
- The primary market helps companies raise capital directly from investors.
Secondary Market
The secondary market is related to money. Here, already issued securities, such as stocks and bonds are bought and sold among financial specialists. It is a platform where people trade shares and others that they have already won. The company doesn’t get any money when investors trade these securities.
For example: Imagine you expanded the toy business through the primary market. After a while, you want a different kind of business. Instead of selling, you exchange your toy business with a friend who has a business you want. This place where you and your friend trade toys is similar to a secondary market.
Key features of the secondary market:
- Investors trade existing securities.
- Investors are free to enter and exit in the secondary market.
- Helps to discover prices through supply and demand.
Over the Counter Market(OTC)
The Over-the-Counter market is a decentralized trading network where stocks, bonds, and other commodities are traded between buyers and sellers. People trade stocks, bonds, and other financial items that aren’t listed (illegal). Trades are done directly between buyers and sellers through the links of dealers and brokers.
For example: Imagine you manufacture spy toys that aren’t sold in regular stores. You sold these toys directly to others without having to visit stores. This is similar to an over-the-counter market. The OTC market is similar to a private network market.
Key features of the OTC market:
- It is a decentralized trading through dealer and broker networks
- It includes diverse securities and a wide range of financial instruments.
- Offers more flexibility on time and listing requirements.
Equity Market
The equity market is a financial platform where stocks of publicly listed companies are traded. It provides a platform for investors to buy and sell ownership stakes in companies, representing a claim on their assets and earnings. Even buying a small share makes you the owner of the company and can earn money from it.
For example: Imagine you are at a toy market, you really like a toy and want to buy it. You tell the seller the amount you want to pay for it. This amount is known as the bid price. The amount for toy seller demand is called the ask price. The debate is settled on negotiated prices.
Key features of the equity market:
- Buying shares represents the ownership of the companies.
- Brokers link traders for the buying and selling of shares.
- The market helps determine the price of shares based on supply and demand.
Key Takeaways
- Company sells shares to raise capital.
- Private market is a platform where companies issue new stocks and bonds to raise funds for investors.
- Secondary market is a platform where existing securities are traded among investors, without the company receiving funds.
- Over-the-counter (OTC) market is for unlisted securities through dealers and brokers.
- Equity market is for buying and selling company shares, determining prices through bid and ask negotiations.
- Brokers connect buyers and sellers in equity markets for seamless transactions.