Securities Market and Financial Market

Securities Market and Financial Market

•      Financial market is classified into 2 types in terms of maturity of securities –

1) Money Market

2) Capital Market

There  are 2 parts of capital market –

– Primary Market

– Secondary Market

Primary Market

•      Market for new securities or IPOs

•      Source of capital (debt or equity)

•      Issuer has to publish prospectus to invite potential investor

•      Securities can be issued through Private and public Placement

Primary market for Public Placement

•      In case of Public Placement, Securities are issued through Investment Bankers who have expertise in the sale of new issues to the public, generally by underwriting the issue

•      Underwriting is the process by which Investment Bankers purchase new issues and assume the risk of reselling those to the public

•      To diversify the risk, investment bankers sometimes form syndicate

•      New issues could be under or over subscribed

Primary market for Private Placement

•      In case of Private Placement, securities are directly issued to corporate investors, mainly financial institutions.

•      No need to register with SEC, that saves time and money

•      No need to appoint Investment Bankers, that saves the fees but even there are appointed, still underwriting spread can be saved

•      Cost of fund is normally higher compare to public placement

Secondary Market

•      Market for existing securities

•      Example – Security Exchanges or Stock Markets

•      Indicates the market value of securities which is determined through supply and demand

•       Provides liquidity to the investors

•      Two segments –

– Secondary Equity Market

– Secondary Bond Market

Secondary Equity Market

•             Equity securities are traded here

•             Two types –

–         Organized Security Exchanges

–         Unorganized Security Exchanges or Negotiated Market

Organized Security Exchanges

•      Also known as Auction Market

•      Securities are traded through brokers and dealers (specialists) who charge commission

•      Example – NYSE, DSE, LSE etc.

•      Corporate investors are involved in Block Trading (transactions involving at least 10,000 shares)

Unorganized Security Exchanges

•      Also known as OTC

•      Example – NASDAQ

•      Dealers are making the market

•      NASD activities (page 92)

Secondary Bond Market

•      Both organized and unorganized bond market exist

•      NYSE has the largest bond market with fully automated trading system (ABS)

•      But mainly an OTC market

•      Types of Bond traded – Treasury Bond, Gov. Agency Bond, Municipal Bond & Corporate Bond

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