
The stock market is a place where stocks of publicly traded companies are issued and traded. It forms an integral part of any economy and financial system, as it provides companies with access to a pool of retail and institutional investors, enabling them to raise new capital for their businesses. The stock market also facilitates the process of stock subscription and transactions, giving investors the flexibility to invest small or large amounts of money in a wide range of publicly traded companies from various industries, without them having to take the risk of starting their own business ventures. The stock market consists of the primary market and the secondary market, and knowing how each of these markets function will be pivotal to understanding how stocks are transacted.
Primary Market
In the primary market, investors purchase newly issued stocks directly from a company, either through an initial public offering (IPO) or a follow-on public offering (FPO). An IPO occurs when a private company sells its stocks to the public for the first time, while a FPO occurs when an existing publicly traded company issues new stocks to the public. The process is usually facilitated by various underwriting firms, such as investment banks, all of which will attempt to build up investor interest for the public offering and work together with the issuing company to determine the offer price of the new stock issue.
Secondary Market
The secondary market is where stocks are traded after a company sells its newly issued stocks to investors. In the secondary market, stocks are bought and sold among investors without the involvement of the issuing company, usually through organised stock exchanges or in the over-the-counter (OTC) markets. The transacted price, however, is usually different from the offer price and determined by market factors. The presence of the secondary market ensures that investors can convert their stock holdings to cash at any time they want. It also enables investors who have failed to purchase stocks directly from a company to become shareholders, as long as they are willing to pay the market price for the stock.
