Select Page

Stock Exchange:

Nature: A stock exchange is a marketplace where securities (such as stocks, bonds, and commodities) are bought and sold. It provides a platform for companies to raise capital by issuing securities and for investors to buy and sell those securities.

Structure:

  1. Listed Securities: Stock exchanges list securities of public companies that meet specific criteria. These companies are said to be “listed” on the exchange.
  2. Brokers and Dealers: Transactions on a stock exchange are facilitated by brokers and dealers. Brokers act as intermediaries between buyers and sellers, executing orders on behalf of clients. Dealers, on the other hand, trade on their own behalf.
  3. Regulation: Stock exchanges are heavily regulated by government authorities to ensure fair and transparent trading practices.

Functioning:

  1. Trading Platform: Stock exchanges provide a platform for trading securities. They match buy and sell orders, ensuring fair and orderly transactions.
  2. Price Determination: The prices of securities on a stock exchange are determined by supply and demand dynamics. When more people want to buy a security than sell it, the price tends to rise, and vice versa.
  3. Market Information: Stock exchanges provide real-time information about the prices of securities, trading volumes, and other relevant data. This information is crucial for investors to make informed decisions.
  4. Liquidity: Exchanges enhance liquidity by providing a centralized market where buyers and sellers can easily find each other.

Limitations:

  1. Market Risk: Stock markets are subject to volatility. Prices can fluctuate due to various factors like economic conditions, geopolitical events, or company-specific news.
  2. Speculation and Bubbles: Sometimes, markets can be influenced by speculative behavior, leading to inflated prices that may not be justified by fundamentals. This can lead to market bubbles.
  3. Information Asymmetry: Not all investors have access to the same information at the same time. Institutional investors and professionals often have an information advantage over individual retail investors.
  4. Regulatory Risks: Changes in government policies and regulations can have a significant impact on stock markets. New regulations can alter the market dynamics and affect investor behavior.

New Issues Markets (Primary Market):

Nature: The primary market is where new securities are issued to the public for the first time. This is typically done through an Initial Public Offering (IPO) for stocks or a bond issuance for debt securities.

Structure:

  1. Issuers: Companies, governments, or other entities that issue securities to raise capital.
  2. Underwriters: These are investment banks or financial institutions that help companies prepare for and execute an IPO or bond issuance.

Functioning:

  1. Capital Raising: The primary market allows companies to raise funds for various purposes, such as expansion, debt repayment, or financing new projects.
  2. Price Discovery: The price of securities in the primary market is determined through a process of book-building or auctions.
  3. Investor Participation: Institutional and retail investors participate in the primary market by subscribing to the new securities being offered.

Limitations:

  1. Market Conditions: The success of an IPO or bond issuance can be influenced by the prevailing market conditions. A weak market can make it harder to raise capital.
  2. Regulatory Approval: Issuers need to meet certain regulatory requirements and obtain approvals before conducting an IPO.
  3. Risk for Investors: Investing in new issues can be riskier compared to trading on the secondary market, as there may be limited historical data available for the securities.
  4. Underpricing and Overpricing: Securities in the primary market can be underpriced (issued at a lower price than their market value) or overpriced (issued at a higher price), which can affect investor returns.