Primary Market and Secondary Market

Primary Market

    The Corporates, who wish to raise the capital, go to public through primary market. It is a place where companies will contact public.

    The Companies will issue the share to Public in primary market. This process is called IPO (Initial Public Offering). Public will subscribe for those shares.

    Say for example, if a company issues one lakh shares. If there is huge demand for those shares, the subscription numbers will be more than the number of shares issued. This is called oversubscribed shares. If the subscription is less than the issue then it is undersubscribed. Once the company raises the capital through IPO, the shares will be traded in Secondary market

Secondary Market

    Secondary market is where the shares are traded. People who already hold the shares will sell it for Higher/Lower price, depends on their need and that companies performance. Buyers will buy the shares from the sellers. This trading will be done based on the demand and supply of the shares.

Summary

    Issuing of shares happen only once in the primary market. After that, is will be traded in the secondary market among the buyers and sellers. So if you missed buying those shares in the primary market, it will be available in the secondary market. You have to buy it from the one who already bought the share for a higher lower price based on the demand for the share.

Capital market and Money market

Firstly, we shall understand what a capital is. 

Capital is Money needed to start and run the business. Companies need capital amount for its preliminary expenses and infrastructure setup of the business. Also they need working capital to run the business consistently. In simple terms, Money needed to setup and run the business is called capital.

Capital requirement can be of long term or short term. Let us assume, if a company is going to invest in a huge plant with advanced machineries, they need lot of capital to invest in that for long term. Sometimes the companies need funds in short term for a quick project.

The financial institutions and investors who help companies in raising long term capital are collectively called as capital market. It can be a Bank, stock market or financing companies who provide long term capital

The financial setup which provides short term capital or working capital to companies is called Money market. Bond, debentures like financial instruments which matures normally within a year are called money market instruments.

Debentures and Bonds

In the previous post we used words like Debentures and Bonds. Let us see what they are..

Companies issue shares and the shares represent part of ownership. A share holder is literally one of the owners of a company.

Debentures and Bonds are also issued by companies and governments who want to raise capital. But people who buy debentures and Bonds does not enjoy ownership of the company like the share holders. They are the lenders who give funds to the company. Debentures and Bonds have a face value. For example, You buy 10 debentures at a face value of $50, the you lend the company $500. the In turn company promises them to pay interests on the debenture amount. Since Debenture can also be traded, we can call it a Security.

So Debentures will fetch you interest earnings and at maturity you will get the face value of the debenture.
It is considered as risk free investment when compared with shares. These debentures are secured against the companies assets. So if a company defaults the assets will be sold to settle the debentures.

Security market

    First, we need to be clear on what is a security. Security is a financial instrument. It can be a Share, Bond or Debentures and it should have ownership transfer capability. For example, you can buy a share today and sell it tomorrow. Today you are the owner and tomorrow the person who buys it from you is the owner. Thus a share can be traded and it is a financial instrument. Hence it can be called as Security.

   You can not sell and transfer ownership of your Recurring Deposit or Bank fixed deposit or life insurance which is in your name. So we can not call them as Securities. 

   So the place where the securities are traded is called security market. The market comprise of the Organisation issuing securities, Traders, Brokers and Regulatory bodies.

Role of stock exchanges

• Stock exchanges help companies raise capital (Primary Market)

• Enable the shares to be traded among public (secondary market)

• Make sure the companies follow the rules and regulations of the stock market regulators (In India, the regulator is SEBI - Securities and Exchanges Board of India)
• It collects all information from the listed companies like change in executive committee, mergers and acquisitions and communicate it public so that the information is spread all over equally.(These information can influence the price of the shares)

• They charge a listing fee for the companies and monitor them for the proper functioning. In case they break the rule. heavy penalty will be imposed on them

What is a Stockexchange and Why is it needed??

We shall understand the need of stock market and what it is in this post. Lets discuss some simple scenarios for better understanding.

1) Let us assume, you, me and one of our friends start a business. We put equal share of capital. After a period of time, you want to exit out of our business and want your share. At that point of time finding another partner immediately and giving away your share is very tough.
(Share is the your share of Ownership)

2) We have got a great idea to expand our business that needs huge capital investment. We are not able to implement the idea due to lack of capital. Raising a huge sum of money in a short period is very tough.

3) A common man has a small investment; he wants to invest a part of that in a large corporation.

A solution for all the above scenarios is the need of Stock Exchange or we can call is Share market.

Share market is a place where the ownership of the company is divided in to multiple shares. Say for example, A company's market capitalisation is $10 Crores and it has One crore outstanding shares, then each share costs $10. You can own one share for $10.

1. If you want to sell the share, you can do it in share market where the buyer meets the seller
2. Corporations can raise a huge capitals by dividing the ownership into multiple shares
3. A common man can invest in large corporation by buying a small number of shares

Share Market is the place which facilitates all the above. It is a place where the corporations raise capital and the shares are traded.

We shall discuss and learn more on stock exchanges coming posts. Happy learning !

EPF and VPF (Employee Provident Fund and Voluntary Provident Fund)

Employee Provident Fund (EPF) plays an important role in retirement planning of all salaried individuals.12% of your basic salary will be invested in EPF while your employer will also contribute equal amount towards the same. This is a mandate for all the companies having more than 20 employees.

If you are working for a corporate, look at your CTC (Cost to Company) breakup. It will have an employer contribution and employee contribution towards EPF.

Benefits:

• Tax Free – The investment and the Interest earned through this are absolutely tax free as it is considered under Section 80C of Investment tax act
• Risk free long term Investment – As it is backed by government and not linked to market, the investment is absolutely safe.

Interest rates:

Interest rate for EPF varies every year. It is decided by government. It is fixed at 8.5% for the Financial Year 2013-2014

VPF

VPF is Voluntary Provident Fund. You can have all the benefits of EPF in VPF (Interest Rates and Tax free return) except, your employer will not contribute equal amount of VPF. The maximum percentage of VPF you can invest is 88% as 12% is already mandatory; you can invest 100% of your basic salary in PF (EPF+VPF).  If can approach your employer investing in VPF. The percentage of contribution can vary every financial year

Withdrawal of EPF and VPF

When you leave your company, the PF amount can be withdrawn from the PF account. It will take two months’ time. You can also transfer it to the new employer’s PF account.

Also you can take loans for Housing, wedding and children’s education from the PF account.

But longer you stay in PF without withdrawing; you will have a huge corpus built when the time you retire.

Happy Investing!