Primary and Secondary Markets

Initial Public Offering (IPO)

When a company seeks to list its shares, it may:

Become listed or quoted
Float on the stock market
Go public
Make an Initial Public Offering (IPO)

Primary Market

The marketing of new shares in a company to investors for the first time.
Raises capital and matches surplus funds with investment opportunities.

Secondary Market

Where investors trade shares after they've been initially issued.
Allows the primary market to function efficiently by facilitating a two-way trade in issued securities.

Stock Exchange

Organized marketplace for issuing and trading securities.
Has rules and regulations for listed companies.
Provides both a primary and a secondary market.

Advantages of Listing (Going Public)

Capital: Raises capital through the IPO and future share offerings. Provides an exit route for original founders.
Takeovers: Can use shares as payment for acquisitions/mergers.
Status: Improves business marketing to customers, suppliers, and employees.
Employees: Stock options attract and retain key staff.

Disadvantages of Listing (Going Public)

Regulation: Strict governance and disclosure requirements.
Takeovers: Vulnerable to hostile takeovers.
Short-termism: Pressure to achieve short-term goals.
Cost: Listing fees, legal, accounting, and ongoing disclosure expenses.

Secondary Market (In Detail)

A secondary market is where securities of companies are traded among investors. Investors can freely buy and sell securities without the issuing company's involvement. The issuing company does not participate in income generation in these transactions among investors. Additionally, share valuation is based on the share's performance in the market.

Features of Secondary Market

Creating Liquidity:

The secondary market's most important feature is creating liquidity, allowing immediate conversion of securities into cash. Since secondary market securities can be bought and sold multiple times, it aids in liquidity creation.

Follows the Primary Market:

Unlike the primary market, new securities cannot be sold for the first time in the secondary market. All new securities are first issued in the primary market and then bought and sold in the secondary market.

Stock Exchange:

The secondary market has a specific place where securities are traded, called the Stock Exchange. However, trading is not mandatory through a stock exchange only. Even two individuals can trade mutually, and it can still be considered a transaction.

Encourages New Investment:

As securities' rates often fluctuate in the share market, many investors come to trade and earn profits, leading to new investments. This results in increased investment in the industrial sector.

Types of Secondary Market

Stock Exchange:

A stock exchange is a regulated marketplace where stocks, bonds, and other securities are bought and sold. The exchange provides a platform for buyers and sellers to come together and trade securities.

Over-the-Counter (OTC) Market:

The OTC market is a decentralized market where securities are traded directly between buyers and sellers without going through a stock exchange. OTC markets are less regulated than stock exchanges and often trade less liquid securities.

Primary vs. Secondary Market: Key Differences

Feature	Primary Market (NIM)	Secondary Market (AIM)
Meaning	New issues of securities are sold to the public.	Existing securities are traded among investors.
Also known as	New Issue Market (NIM)	After Issue Market (AIM)
Type of purchase	Direct	Indirect
Trading	Between company and investors	Between investors
Parties	Underwriters/Investment Bankers	Brokers

Depositary Receipts

What are Depositary Receipts?

Financial instrument representing ownership of a foreign company's shares.
Allows indirect investment in foreign companies without directly purchasing shares.
Various forms: American Depositary Receipts (ADRs), Global Depositary Receipts (GDRs), European Depositary Receipts (EDRs).
Issued by banks or financial institutions holding the actual shares.
Provides portfolio diversification and exposure to international markets.
Custodian Bank: The bank or financial institution that issues the depository receipts acts as a custodian for the underlying shares of the foreign company. They hold these shares on behalf of the depository receipt holders and facilitate the issuance and redemption of receipts.

American Depositary Receipts (ADRs)

Introduced in 1927.
Enables US investors to hold overseas shares, avoiding high dealing costs and settlement delays.
Dollar-denominated, issued in bearer form, depository bank is the registered shareholder.
Depository bank handles dividend payments (in USD) and voting via proxy.
Beneficial owner can cancel the ADR and become the registered owner of the shares.
Helps non-US companies attract US investors to raise funds.
Listed and traded on NYSE and NASDAQ.

Global Depositary Receipts (GDRs)

Issued outside the US.
Traded on many exchanges.

World Stock Markets

Organized marketplace for issuing and trading securities.
Listed companies must meet specific criteria.
Trading systems: quote-driven or order-driven.

Trading Systems

Quote-Driven Systems

Market makers provide continuous bid and offer prices.
Make a profit through the price spread.
Example: NASDAQ

Order-Driven Systems

Electronic order book or auction process matches buyers and sellers.
Buyers and sellers matched chronologically by price and quantity.
No market makers required.
Member firms input orders via computer terminals.
Orders added to buy/sell queues or executed immediately.

Stock Market Indices

Compute prices of a country’s listed companies.
Snapshot of share price progress.
Benchmark for investors to assess portfolio performance.
Four uses:
- Act as Market Barometer
- Assist in Performance Measurement
- Act as the basis for index tracker funds, exchange-traded funds, index derivatives and other index-related products.
- Support Portfolio Management Research and Asset Allocation Decisions

Types of indices:

Price-weighted: (Dow Jones Industrial Average (DJIA)) Only share price considered.
Market capitalization-weighted: Takes into account the relative market capitalization of each stock.
Equal-weighted: Assumes an equal investment in each stock.

Settlement Systems

###What is the difference between a depository and a clearing house?

A depository holds and transfers securities, while a clearing house validates and settles transactions. ##Depository
A financial institution that keeps securities safe and facilitates their transfer
A centralized facility that holds securities in electronic form, known as demat accounts
Eliminates the risk of theft and loss of physical securities
Processes and settles transactions
Distributes corporate benefits
Typically pays interest on deposits
Creates liquidity by lending out money ##Clearing house
A financial institution that acts as an intermediary between buyers and sellers
Validates transactions so that the buyer pays the seller the agreed-upon amount
Ensures that both parties fulfill their obligations in a trade
Processes payments safely and accurately
Validates, clears, and settles trades executed on a stock exchange or other trading platform
Helps payments move between different banks
Ensures the smooth transfer of funds and securities

Settlement

Final phase of the trading process.
Delivery versus payment (DvP): Simultaneous exchange of stock and cash.
Electronic systems: "Book entry transfer" (changing electronic records of ownership).
For example, European equity trades are settled at T+2 which means that the trade will settle two business days after the trade date – so, a trade executed on Monday should settle two business days later on Wednesday.

Money Markets

Wholesale/institutional markets for cash.
Issue, trading, and redemption of short-dated negotiable securities.
Maturity up to one year (typically three months or less).
Instruments issued at a discount to face value.

Money Market Funds

Money market mutual fund, a collective investment scheme (CIS).
Pools investors’ money to invest in short-term debt instruments (Treasury bills, CP).
Pooling of funds, investor access to assets not otherwise available.
Returns tend to be greater than a simple money market account.

Advantages and Disadvantages

Short-term home for cash balances.
Alternative to bonds and equities (in uncertain times).
Disadvantage: Higher returns usually require larger investments.
Money market funds: Invest in range of instruments, AAA-rated.
Investment may be at risk and may not be suitable for all investors.
Exchange rate risk.

Property

Unique asset class.
- Individual properties are unique.
- Subjective valuation.
- Complex legal considerations and high transaction costs.
- Relatively illiquid (can't sell parts of it easily).
- Diversification is difficult.
- Supply of land is finite.
Many private investors have chosen to become involved in the property market through the buy-to-let market or simply by buying a second home.
Other investors wanting to include property within a diversified portfolio generally seek indirect exposure via a mutual fund, property bonds issued by insurance companies, or shares in publicly quoted property companies.

Foreign Exchange (FX)

Trading of one currency for another.
Largest market in the world.
Trading currencies became 24-hour because it could take place in the various time zones of Asia, Europe and America. London, being located between the Asian and American time zones, was well placed to take advantage of this and has grown to become the world’s largest forex market.

Currency Quotes

When currencies are quoted, the first currency is the base currency and the second is the counter or quote currency.
The base currency is always equal to one unit of that currency, in other words, one pound, one dollar or one euro.
For example, the EUR:USD exchange rate may be quoted as 1:1.1250, which means that €1 is worth US$1.125.
When the exchange rate is going up, it means that the value of the base currency is rising relative to the other currency and is referred to as the currency strengthening, and, when the opposite is the case, the currency is said to be weakening.
OTC Market, brokers and dealers negotiate directly with one another.
The main participants are large international banks which continually provide the market with both bid (buy) and ask (sell) prices.
Central banks are also major participants in FX markets, which they use to try to control money supply, inflation, and interest rates.

FX Transactions

Spot transactions - the spot rate is the rate quoted by a bank for the exchange of one currency for another with immediate effect.
Forward transactions - A buyer and seller agree on an exchange rate for any date in the future, for a fixed sum of money, and the transaction occurs on that date, regardless of what the market rates are then.
Futures - standardized versions of forward transactions that are traded on derivatives exchanges in standard sizes and maturity dates.
Swaps - two parties exchange currencies for a certain length of time and agree to reverse the transaction at a later date. These are not exchange-traded contracts and, instead, are negotiated individually between the parties to a swap.