Initial Public Offering or IPO: Primary Markets Secondary Markets

The
concept behind how the stock market works is pretty simple. Operating
much like an auction house, the stock market enables buyers and sellers to
negotiate prices and make trades.
The stock market works through a network of exchanges. Companies list
shares of their stock on an exchange through a process called an initial public
offering or IPO. Investors purchase those shares, which allows the company to
raise money to grow its business. Investors can then buy and sell these stocks
among themselves, and the exchange tracks the supply and demand of each
listed stock.
That supply and demand help determine the price for each security or the
levels at which stock market participants — investors and traders — are willing
to buy or sell.
Buyers offer a “bid,” or the highest amount they’re willing to pay, which is
usually lower than the amount sellers “ask” for in exchange. This difference is
called the bid-ask spread. For a trade to occur, a buyer needs to increase his
price or a seller needs to decrease hers.
This all may sound complicated, but computer algorithms generally do most
price-setting calculations. When buying stock, you’ll see the bid, ask, and bid-
ask spread on your broker's website, but in many cases, the difference will be
pennies, and won’t be of much concern for beginner and long-term investors.
In a nutshell, stock markets provide a secure and regulated environment where

market participants can transact in shares and other eligible financial instruments
with confidence with zero- to low-operational risk. Operating under the defined
rules as stated by the regulator, the stock markets act as primary markets and
as secondary markets.
As a primary market, the stock market allows companies to issue and sell their
shares to the common public for the first time through the process of initial public
offerings (IPO). This activity helps companies raise necessary capital from
investors. It essentially means that a company divides itself into several shares
(say, 20 million shares) and sells a part of those shares (say, 5 million shares) to
the common public at a price (say, $10 per share).
To facilitate this process, a company needs a marketplace where these shares

can be sold. This marketplace is provided by the stock market. If everything goes
as per the plans, the company will successfully sell the 5 million shares for $10
per share and collect $50 million worth of funds. Investors will get the company
shares which they can expect to hold for their preferred duration, in anticipation
of rising in share price and any potential income in the form
of dividend payments. The stock exchange acts as a facilitator for this capital-
raising process and receives a fee for its services from the company and its
financial partners.
Following the first-time share issuance IPO exercise called the listing process,
the stock exchange also serves as the trading platform that facilitates regular
buying and selling of the listed shares. This constitutes the secondary market.
The stock exchange earns a fee for every trade that occurs on its platform during
the secondary market activity.
The stock exchange shoulders the responsibility of ensuring price

transparency, liquidity, price discovery, and fair dealings in such trading activities.
As almost all major stock markets across the globe now operate electronically,
the exchange maintains trading systems that efficiently manage the buy and sell
orders from various market participants. They perform the price matching
function to facilitate trade execution at a price fair to both buyers and sellers.
A listed company may also offer new, additional shares through other offerings at
a later stage, like through rights issues or follow-on offers. They may
even buyback or delist their shares. The stock exchange facilitates such
transactions.
The stock exchange often creates and maintains various market-level and
sector-specific indicators, like the S&P 500 index or Nasdaq 100 index, which
provide a measure to track the movement of the overall market. Other methods
include the Stochastic Oscillator and Stochastic Momentum Index.
The stock exchanges also maintain all company news, announcements, and
financial reporting, which can be usually accessed on their official websites. A
stock exchange also supports various other corporate-level, transaction-related
activities. For instance, profitable companies may reward investors by paying
dividends which usually come from a part of the company’s earnings. The
exchange maintains all such information and may support its processing to a
certain extent.
The price of a stock fluctuates according to supply and demand, investor confidence, world
events, and information about company profits, among other factors. Since there are only so
many shares of a stock on the market at a given time, the price will rise if more buyers are trying
to get it than sellers hawking it. The reverse is also true; if there are more sellers than buyers,
sellers will lower their prices to account for that.
The stock market works by enabling buyers and sellers to negotiate their prices for
assets in a regulated forum. Buyers enter bids for shares in a company and sellers
issue an asking price for their assets. Once a bid price equals the ask, a trade occurs.
Historically, stock markets were physical locations known as pits. However, most trades
now take place via electronic trading platforms, which display the best bid and ask
prices available at the current moment.
The difference between buy and sell prices is called the bid-ask spread. A narrow bid-
ask spread indicates liquidity in the market, while a wider bid-ask spread indicates low
trader activity. When looking to invest or trade shares
Only shares of publicly traded companies are available to trade on the stock market. So,
before buyers and sellers can trade or invest, a private company must first release its
shares into the market – this is known as a primary market. Once the shares have been
sold by the company, they’re then free to be traded between market participants, in
what’s known as the secondary market.
The primary market is where shares are listed on a stock exchange by a private
company. For the firm, the purpose of any primary market is to raise capital for
expansion and strategic operations. For an investor or trader, a primary market allows
them to get in on the ground floor of a company and take advantage of any growth the
firm might experience.

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In a nutshell, stock markets provide a secure and regulated environment where

To facilitate this process, a company needs a marketplace where these shares

The stock exchange shoulders the responsibility of ensuring price

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