Questions and Answers
What is a right issue?
What is a key characteristic of a bonus issue?
Which type of private placement can only be made for equity shares or securities convertible into equity shares?
What does secondary market refer to?
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Which statement is true regarding private placements?
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In a right issue, what can shareholders do if they choose not to accept the offer?
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What is the SEC's Qualified Institutional Placement (QIP)?
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What is the primary purpose of a bonus issue?
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What kind of shares are typically involved in a preferential allotment?
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Study Notes
Primary Market
- The primary market, also known as the new issue market, deals with the issuance of new securities.
- It enables companies to raise long-term funds by issuing stocks and debentures for the first time.
Functions of the Primary Market
- Origination: Involves investigating, analyzing, and processing new investment proposals by specialist agencies.
- Underwriting: Investment companies guarantee the sale of new issues, mitigating risks from market uncertainty.
- Distribution: Involves selling securities to final investors; successful issuance relies on effective distribution.
Major Reforms in the Primary Market Post-1991
- Foreign Institutional Investors (FIIs) allowed to operate in the Indian market, enhancing equity and debt investment opportunities.
- Indian companies gained access to global finance, benefiting from reduced borrowing costs.
Overview of Financial Markets
- Financial markets encompass various segments, including money markets and capital markets.
Money Market Instruments
- Call/Notice Money: Short-term borrowing and lending between banks.
- Treasury Bills: Short-term government securities used to manage liquidity.
- Commercial Bills: Short-term credit instruments issued by companies to finance their working capital.
- Commercial Paper: Unsecured, short-term debt issued by corporations.
- Certificate of Deposit: Time deposits with banks that pay interest.
- Cash Management Bills: Short-term instruments used for managing short-term liabilities.
Capital Market
- Capital markets facilitate the buying and selling of long-term securities.
Public, Rights, and Bonus Issues
- Public Issue: Offering securities to the general public for the first time.
- Right Issue: Allows existing shareholders to purchase additional shares at a discount; participation is optional.
- Bonus Issue: Distributes additional shares to existing shareholders without new capital inflow, often as a means of distributing profits.
Private Placement
- Involves issuing shares directly to a select group of investors, such as banks and mutual funds.
- Preferential Allotment: A private placement method focusing on equity shares or equity-convertible securities.
- Qualified Institutional Placement (QIP): Designed for listed companies to issue shares to Qualified Institutional Buyers (QIBs), established by SEBI in 2006.
Secondary Market
- The secondary market comprises transactions involving existing securities, where all sales following the initial issuance occur.
- Known for providing liquidity and price discovery for previously issued securities.
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Description
This quiz focuses on understanding the key concepts of primary and secondary markets in finance. Explore how new securities are issued in the primary market and learn about the functions of the secondary market. Test your knowledge on terminology and market operations relevant to traders and companies.