Course Code: FIN214 Course Title: CA 2

Course Instructor: Dr. Anil Kumar Section: K0119

Academic Task no: 2 Academic Task Title :CA 2
Date of Allotment: 02-11-2021 Date of Submission: 21-11-2021
Student roll no: RK0119A64 Student Reg no: 11909588

Learning Outcomes:
Declaration:
I declare that this assignment is my individual work . I have not copied it from any
other student work or from any other source except where due acknowledgement is
made explicity in the text, nor has any part written for mr by any other person.
Name – Utkarsh Tripathi
Registration No.–11909588

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Evaluator’s comments (For Instructor’s use only)

Evaluator’s Signature and Date:

Marks obtained: - Max Marks:-30

Ques 1 - Describe the role and function of primary market.
Ans - The primary market is a segment of the capital market where entities such as companies,
governments and other institutions obtain funds through the sale of debt and equity -based
securities.

When a company decides to go public for the first time by raising an Initial Public Offering (IPO), it
is done in the primary market. Since the securities are sold for the first time here, a primary market
is also known as the New Issue Market (NIM).

During an IPO, the company sells its shares directly to the investors in the primary market. The
entire process of raising investment capital by selling new stock to investors through an IPO is
known as underwriting.

Once the shares are sold, they are bought and sold by traders in the secondary market.
The primary market is a segment of the capital market where entities such as companies,
governments and other institutions obtain funds through the sale of debt and equity -based
securities.

When a company decides to go public for the first time by raising an Initial Public Offering (IPO), it
is done in the primary market. Since the securities are sold for the first time here, a primary market
is also known as the New Issue Market (NIM).

During an IPO, the company sells its shares directly to the investors in the primary market. The
entire process of raising investment capital by selling new stock to investors through an IPO is
known as underwriting.

Once the shares are sold, they are bought and sold by traders in the secondary market.
Functions of Primary Market

Some of the essential functions of primary market are as follows:

New Issue Offer

This is one of the major primary market functions. It is this market that organises
offering of a new issue, which has not been traded on any other exchange before. It’s
because of this reason that the primary market is also called new issue market.

There’s a lot that goes into issuing a new offer. It involves a detailed assessment of the
viability of a project and among the financial arrangement for the purpose involves
taking into consideration the promoter’s debt-equity ratio, liquidity ratio, and equity ratio,
among others.

Underwriting Services

One of the most important and vital aspects of offering a new issue offer is underwriting.
The role of an underwriter in the primary marketplace is to buy unsold shares. Often
financial institutions play the role of underwriters, earning a commission in the process.

Often investors depend on underwriters to gauge whether undertaking the risk would be
worth the returns. It may also happen that the underwriter buys the entire IPO issue,
subsequently selling it to investors.

Distribution of New Issue

This is another vital function of primary market. The distribution process is initiated with a new
prospectus issue.

The public is invited at large to purchase the new issue, and detailed information is given on the
company and the issue along with the underwriters

Advantages of Primary Market

Now that you know the meaning of primary market, its features, and functions, let’s see some of its
advantages.

A Cost-Effective Way to Raise Capital

Companies can raise capital for their business cost-effectively and seamlessly in a primary market.
Also, securities offered in the primary market can almost be instantly sold in the secondary market,
thus providing high liquidity.

Less Chances of Price Manipulation

As compared to secondary market, there are less chances of price manipulation in the primary
market. This leads to better transparency and operations.

Offers Diversification

Primary market serves as a potential avenue for diversification for investors, thus
bringing down the quantum of risk. Investors can allocate their investments across asset
classes in multiple financial instruments

Disadvantages of Primary Market

There are also certain disadvantages of primary market. They are:

Limited Information Available to Investors

Often there may be limited they invest in an IPO. This is because information available to investors
before unlisted companies are outside the purview of SEBI’s regulations.

No Historical Trading Data

As shares are issued for the first time, there’s no historical data available to analyse the IPO
shares. This can make investment a little difficult. Also, if a share is oversubscribed, then small
investors may not be able to receive their allocation.
QUES 2 - Evaluate different kind of issues of primary market e.g. IPO, FPO, Right
Issue etc.
Ans - Types of primary market issues
Public issue
The public issue is one of the most common methods of issuing securities to the public.
The company enters the capital market to raise money from kinds of investors. Here, the
securities are offered for sale to new investors. The new investor becomes the
shareholder of the issuing company. This is called a public issue. The further classification
of the public is

Initial Public Offer

As the name suggests, it is a fresh issue of equity shares or convertible securities by an
unlisted company. These securities are traded previously or offered for sale to the general
public. After the process of listing, the company’s share is traded on the stock exchange.
The investor can buy and sell securities after listing in the secondary market.

Further Public Offer or Follow on Offer or FPO.

When a listed company on the stock exchange announces fresh issues of shares to the
general public. The listed company does this to raise additional funds.

Private placement
Private placements mean that when a company offers its securities to a small group of
people. The securities may be bonds, stocks, or other securities. The investors can be
either individual or institution or both.
Comparatively, private placements are more manageable to issue than an IPO. The
regulatory norms are significantly less. Also, it reduces cost and time. The private
placement is suitable for companies that are at early stages (like startups). The company
may raise capital through an investment bank or a hedge fund or ultra-high net worth
individuals (HNIs)

Preferential issue
The preferential issue is one of the quickest methods for a company to raise capital for
their business. Here, both listed and unlisted companies can issue shares. Usually, these
companies issue shares to a particular group of investors.
It is important to note that the preferential issue is neither a public issue nor a rights issue.
In the preferential allotment, the preference shareholders receive dividends before the
ordinary shareholders receive it.
Qualified institutional placement.
Qualified institutional placement is another type of private placement. Here, the listed
company issues equity shares or debentures (partly or wholly convertible) or any other
security not including warrants. These securities are convertible in nature. Qualified
institutional buyer (QIB) purchases these securities.
QIBs are investors who have requisite financial knowledge and expertise to invest in the
capital market. Some of the QIBs are –
Foreign institutional investors who are registered with SEBI.

• Alternate investment funds

• Foreign venture capital investors
• Mutual funds
• Public financial institutions
• Insurers
• Scheduled commercial banks
• Pension funds

Comparatively, qualified institutional allotment is simpler than the preferential allotment.

The reason is they do not attract any standard regulations like submitting pre-issue filings
with SEBI. Thus, the process becomes much more comfortable and less time-consuming.

Rights issue
This is another type of issue in the primary market. Here, the company issues shares to its
existing shareholders by offering them to purchase more. The issue of securities is at a
predetermined price.
In a rights issue, the investors have a choice of buying shares at a discount price within a
specific period. It enhances the control of the existing shareholders of the company. It
helps the company to raise funds without any additional costs.

Bonus issue
When a company issues fully paid additional shares to its existing shareholders for free.
The company issues shares from its free reserves or securities premium account. These
shares are a gift for its current shareholders. However, the issuance of bonus shares does
not require fresh capital
Ques 3 - Differentiate the secondary market from the primary market.

Ans - Primary Market

A primary market is defined as the process wherein the market becomes a source of securities. In the
market, securities are created for the people who are investing to buy. These securities are issued in the
stock exchange markets so that the companies, as well as the government are able to provide capital.
The major function of the primary markets is to enable the company to provide long-term funds. These
funds are made by the issue of debentures. An IPO (Initial Public Offering) is a common example of a
primary market. An IPO is defined as the process wherein the company issues stocks in the name of the
public. An individual needs to have prior knowledge of these markets before investing. The main
objective of the primary market is to sell the new shares issued.

Secondary Market
The secondary market is defined as the place wherein the issued shares of the company are traded
among the investors. In layman's terms, the investors can easily buy or sell the shares without the
interference of the company. The secondary market can be categorized into four segments, i.e., auction
market, direct search markets, dealer market, and broker market. The significant examples of the
secondary market include NYSE (New York Stock Exchange), NSE (National Stock Exchange), etc. One
of the major disadvantages of the secondary market is that the price fluctuates very often. This can
sometimes lead to an immediate loss of money. There are several other features associated with
secondary markets that we will discuss later. Now, let us discuss the fundamental contrasting points
between these markets.

DIFFERENCE BETWEEN PRIMARY AND SECONDARY MARKET

1. The securities are formerly issued in a market known as Primary Market, which is then
listed on a recognised stock exchange for trading, which is known as a secondary
market.
2. The prices in the primary market are fixed while the prices vary in the secondary market
depending upon the demand and supply of the securities traded.
3. Primary market provides financing to new companies and also to old companies for
their expansion and diversification. On the contrary, secondary market does not provide
financing to companies, as they are not involved in the transaction.
4. At the primary market, the investor can purchase shares directly from the company.
Unlike Secondary Market, when investors buy and sell the stocks and bonds among
themselves.
5. Investment bankers do the selling of securities in case of Primary Market. Conversely,
brokers act as intermediaries while trading is done in the secondary market.
6. In the primary market, security can be sold only once, whereas it can be done an infinite
number of times in case of a secondary market.
 7. The amount received from the securities are income of the company, but same is the
income of investors when it is the case of a secondary market.
8. The primary market is rooted in a particular place and has no geographical presence, as
it has no organisational setup. Conversely, the Secondary market is present physically,
as stock exchange, which is situated in a particular geographical area.

QUES 4 - Analyze the various products dealt in the secondary market e.g. Equity,
Debt, and Derivative etc.

Ans -

For buying equities, the secondary market is commonly referred to as the "stock market." This
includes the New York Stock Exchange (NYSE), Nasdaq, and all major exchanges around the world.
The defining characteristic of the secondary market is that investors trade among themselves.
That is, in the secondary market, investors trade previously issued securities without the issuing
companies' involvement. For example, if you go to buy Amazon (AMZN) stock, you are dealing only
with another investor who owns shares in Amazon. Amazon is not directly involved with the
transaction.

In the debt markets, while a bond is guaranteed to pay its owner the full par value at maturity, this
date is often many years down the road. Instead, bondholders can sell bonds on the secondary
market for a tidy profit if interest rates have decreased since the issuance of their bond, making it
more valuable to other investors due to its relatively higher coupon rate.

The secondary market can be further broken down into two specialized categories –

Debt Market
Investments in debt securities typically involve less risk than equity investments and offer a lower
potential return on investment. Debt investments by nature fluctuate less in price than stocks. Even
if a company is liquidated, bondholders are the first to be paid.

Bonds are the most common form of debt investment. These are issued by corporations or by the
government to raise capital for their operations and generally carry a fixed interest rate. Most are
unsecured but are issued with a rating by one of several agencies such as Moody's to indicate the
likely integrity of the issuer.

Risky Real Estate and Mortgage-Backed Debt

Real estate and mortgage debt investments are other large categories of debt instruments. Here, the
underlying asset securing the debt is real estate know as the collateral. Many real estate- and
mortgage-backed debt securities are complex in nature and require the investor to be
knowledgeable of their risks.

The Changing Value of Fixed-Rate Bonds

It is reasonable to ask why a fixed-rate investment can change in value. If an individual investor buys
a bond, it will pay a set amount of interest periodically until it matures, and then can be redeemed at
face value. However, that bond might be resold in the debt market, called the secondary market.

The bond retains its face value at maturity. However, its real yield, or net profit, to a buyer change
constantly. It loses yield by the amount that has already been paid in interest. The investment value
increases or decreases with the constant fluctuations in the going interest prices offered by newly-
issued bonds. If the interest rate of return on the bond is higher than the going rate, and the bond a
reasonable time until maturity, the value may be at par or above the face value

Equity Market
Equity, or stock, represents a share of ownership of a company. The owner of an equity stake may profit
from dividends. Dividends are the percentage of company profits returned to shareholders. The equity holder
may also profit from the sale of the stock if the market price should increase in the marketplace.

The owner of an equity stake can also lose money. In the case of bankruptcy, they may lose the entire stake.
The equity market is volatile by nature. Shares of equity can experience substantial price swings, sometimes
having little to do with the stability and good name of the corporation that issued them.

Volatility can be caused by social, political, governmental, or economic events. A large financial industry
exists to research, analyze, and predict the direction of individual stocks, stock sectors, and the equity market
in general.

The equity market is viewed as inherently risky while having the potential to deliver a higher return than other
investments. One of the best things an investor in either equity or debt can do is to educate themselves and
speak to a trusted financial advisor

Derivative Market
Derivatives are securities whose value is dependent on or derived from an underlying
asset. For example, an oil futures contract is a type of derivative whose value is based on
the market price of oil. Derivatives have become increasingly popular in recent decades,
with the total value of derivatives outstanding currently estimated at over $600 trillion.

Common examples of derivatives include futures contracts, options contracts, and credit
default swaps. Beyond these, there is a vast quantity of derivative contracts tailored to
meet the needs of a diverse range of counterparties. In fact, since many derivatives are
traded over the counter (OTC), they can in principle be infinitely customized.

Derivatives can be a very convenient way to achieve financial goals. For example, a company that
wants to hedge against its exposure to commodities can do so by buying or selling energy
derivatives such as crude oil futures. Similarly, a company could hedge its currency risk by
purchasing currency forward contracts.

Derivatives can also help investors leverage their positions, such as by buying equities through stock
options rather than shares. The main drawbacks of derivatives include counterparty risk, the inherent
risks of leverage, and the fact that complicated webs of derivative contracts can lead to systemic
risks.

Types of Derivatives
Derivatives are now based on a wide variety of transactions and have many more uses. There are
even derivatives based on weather data, such as the amount of rain or the number of sunny days in
a region.
There are many different types of derivatives that can be used for risk management, speculation,
and leveraging a position. The derivatives market is one that continues to grow, offering products to
fit nearly any need or risk tolerance. The most common types of derivatives are futures, forwards,
swaps, and options.

Futures
A futures contract, or simply futures, is an agreement between two parties for the purchase and
delivery of an asset at an agreed-upon price at a future date. Futures are standardized contracts that
trade on an exchange. Traders use a futures contract to hedge their risk or speculate on the price of
an underlying asset. The parties involved are obligated to fulfill a commitment to buy or sell the
underlying asset

Cash Settlements of Futures

Not all futures contracts are settled at expiration by delivering the underlying asset. If both parties in
a futures contract are speculating investors or traders, it is unlikely that either of them would want to
make arrangements for the delivery of several barrels of crude oil. Speculators can end their
obligation to purchase or deliver the underlying commodity by closing (unwinding) their contract
before expiration with an offsetting contract.

Forwards
Forward contracts or forwards are similar to futures, but they do not trade on an exchange. These
contracts only trade over-the-counter. When a forward contract is created, the buyer and seller may
customize the terms, size, and settlement process. As OTC products, forward contracts carry a
greater degree of counterparty risk for both parties.

Swaps
Swaps are another common type of derivative, often used to exchange one kind of cash flow with
another. For example, a trader might use an interest rate swap to switch from a variable interest rate
loan to a fixed interest rate loan, or vice versa.

Options
An options contract is similar to a futures contract in that it is an agreement between two parties to
buy or sell an asset at a predetermined future date for a specific price. The key difference between
options and futures is that with an option, the buyer is not obliged to exercise their agreement to buy
or sell. It is an opportunity only, not an obligation, as futures are. As with futures, options may be
used to hedge or speculate on the price of the underlying asset.
THANK YOU !