Markets: Static Concepts- 1 | Economy for UPSC 2024 (Pre & Mains) PDF Download

 Page 1


MARKETS
STATIC CONCEPTS
Page 2


MARKETS
STATIC CONCEPTS
Primary
The mechanism by which the companies raise capital from the issuing if the shares is called 
Primary Market. 
Thus, Primary market is for raising the Equity capital or share capital, which is the owners' 
interest on the assets of the enterprise after deducting all its liabilities. 
It appears on the balance sheet / statement of financial position of the company.
Secondary
When the shareholder needs the money back, he / she would not sell it back to the company 
except in some cases, (such as buyback offer) but would sell them to other new investors. 
The trade of shares does not reduce or alter the company's capital. 
This trading of shares is facilitated by the Stock Exchanges, which bring such sellers and 
buyers together and facilitate trading. 
Therefore, companies raising money from public are required to list their shares on the stock 
exchange. This mechanism of buying and selling shares through stock exchange is known as the 
secondary markets.
Page 3


MARKETS
STATIC CONCEPTS
Primary
The mechanism by which the companies raise capital from the issuing if the shares is called 
Primary Market. 
Thus, Primary market is for raising the Equity capital or share capital, which is the owners' 
interest on the assets of the enterprise after deducting all its liabilities. 
It appears on the balance sheet / statement of financial position of the company.
Secondary
When the shareholder needs the money back, he / she would not sell it back to the company 
except in some cases, (such as buyback offer) but would sell them to other new investors. 
The trade of shares does not reduce or alter the company's capital. 
This trading of shares is facilitated by the Stock Exchanges, which bring such sellers and 
buyers together and facilitate trading. 
Therefore, companies raising money from public are required to list their shares on the stock 
exchange. This mechanism of buying and selling shares through stock exchange is known as the 
secondary markets.
IPO
When an unlisted company makes either a fresh issue of securities or an offer for sale of its 
existing securities or both for the first time to the public, it is called Initial Public Offering or IPO. 
An IPO paves way for listing and trading of the issuer’s securities.
In India, there is a system of free pricing since 1992.
SEBI does not play any role in pricing of shares, but the company and merchant banker are 
required to give full disclosures of the parameters which they had considered while deciding the 
issue price. 
While deciding the prices, there are two possibilities,
Fixed Price - Where company and Lead Merchant Banker fix a price. 
Price discovery through book building process - Where the company and the Lead 
Manager (LM) stipulate a floor price or a price band and leave it to market forces to 
determine the final price.
Page 4


MARKETS
STATIC CONCEPTS
Primary
The mechanism by which the companies raise capital from the issuing if the shares is called 
Primary Market. 
Thus, Primary market is for raising the Equity capital or share capital, which is the owners' 
interest on the assets of the enterprise after deducting all its liabilities. 
It appears on the balance sheet / statement of financial position of the company.
Secondary
When the shareholder needs the money back, he / she would not sell it back to the company 
except in some cases, (such as buyback offer) but would sell them to other new investors. 
The trade of shares does not reduce or alter the company's capital. 
This trading of shares is facilitated by the Stock Exchanges, which bring such sellers and 
buyers together and facilitate trading. 
Therefore, companies raising money from public are required to list their shares on the stock 
exchange. This mechanism of buying and selling shares through stock exchange is known as the 
secondary markets.
IPO
When an unlisted company makes either a fresh issue of securities or an offer for sale of its 
existing securities or both for the first time to the public, it is called Initial Public Offering or IPO. 
An IPO paves way for listing and trading of the issuer’s securities.
In India, there is a system of free pricing since 1992.
SEBI does not play any role in pricing of shares, but the company and merchant banker are 
required to give full disclosures of the parameters which they had considered while deciding the 
issue price. 
While deciding the prices, there are two possibilities,
Fixed Price - Where company and Lead Merchant Banker fix a price. 
Price discovery through book building process - Where the company and the Lead 
Manager (LM) stipulate a floor price or a price band and leave it to market forces to 
determine the final price.
Book Building Process
Book Building is basically a process used in IPOs for efficient price discovery. It is a mechanism where, 
during the period for which the IPO is open, bids are collected from investors at various prices, which  
are above or equal to the floor price. The offer price is determined after the bid closing date.
Prospectus
SEBI guidelines stipulate that the company must provide "disclosure of information to the public".
This disclosure would include the information such as what is the reason for raising money, how this 
money will be spent, what are possible returns on expected money. 
All this contained in a document which is called "Prospectus".
Follow on Public Offer
FPO refers to follow on public offering. 
It is also known as Further Issue. 
A Further Issue is when an already listed company makes either a fresh issue of securities to the 
public or an offer for sale to the public, through an offer document.
Subscription to IPOs can be  Over or Under  depending upon how many people 
participate in the new issue of the equity.
Page 5


MARKETS
STATIC CONCEPTS
Primary
The mechanism by which the companies raise capital from the issuing if the shares is called 
Primary Market. 
Thus, Primary market is for raising the Equity capital or share capital, which is the owners' 
interest on the assets of the enterprise after deducting all its liabilities. 
It appears on the balance sheet / statement of financial position of the company.
Secondary
When the shareholder needs the money back, he / she would not sell it back to the company 
except in some cases, (such as buyback offer) but would sell them to other new investors. 
The trade of shares does not reduce or alter the company's capital. 
This trading of shares is facilitated by the Stock Exchanges, which bring such sellers and 
buyers together and facilitate trading. 
Therefore, companies raising money from public are required to list their shares on the stock 
exchange. This mechanism of buying and selling shares through stock exchange is known as the 
secondary markets.
IPO
When an unlisted company makes either a fresh issue of securities or an offer for sale of its 
existing securities or both for the first time to the public, it is called Initial Public Offering or IPO. 
An IPO paves way for listing and trading of the issuer’s securities.
In India, there is a system of free pricing since 1992.
SEBI does not play any role in pricing of shares, but the company and merchant banker are 
required to give full disclosures of the parameters which they had considered while deciding the 
issue price. 
While deciding the prices, there are two possibilities,
Fixed Price - Where company and Lead Merchant Banker fix a price. 
Price discovery through book building process - Where the company and the Lead 
Manager (LM) stipulate a floor price or a price band and leave it to market forces to 
determine the final price.
Book Building Process
Book Building is basically a process used in IPOs for efficient price discovery. It is a mechanism where, 
during the period for which the IPO is open, bids are collected from investors at various prices, which  
are above or equal to the floor price. The offer price is determined after the bid closing date.
Prospectus
SEBI guidelines stipulate that the company must provide "disclosure of information to the public".
This disclosure would include the information such as what is the reason for raising money, how this 
money will be spent, what are possible returns on expected money. 
All this contained in a document which is called "Prospectus".
Follow on Public Offer
FPO refers to follow on public offering. 
It is also known as Further Issue. 
A Further Issue is when an already listed company makes either a fresh issue of securities to the 
public or an offer for sale to the public, through an offer document.
Subscription to IPOs can be  Over or Under  depending upon how many people 
participate in the new issue of the equity.
GREEN SHOE OPTION
Greenshoe option is a special provision in an IPO prospectus, which allows underwriters to sell 
investors more shares than originally planned by the issuer. This would normally be done if the 
demand for a security issue proves higher than expected.