Question

which results in increase in fixed capital requirements. Distinguish between 'Primary Market' and 'Secondary Market' on the basis of any six points.…

Accepted Answer

(a) Differences between Primary market and Secondary market: Primary market Secondary market --- --- There is sale of securities by new companies or further (new issues of securities by existing companies to investors). There is trading of existing shares only. Securities are sold by the company to the investor directly (or through an intermediary). Ownership of existing securities is exchanged between investors. The company is not involved at all. The flow of funds is from savers to investors, i.e. the primary market directly promotes capital formation It enhances encashability (liquidity) of shares, i.e. the secondary market indirectly promotes capital formation Only buying of securities takes place in the primary market, securities cannot be sold there Both the buying and the selling of securities can take place on the stock exchange Prices are determined and decided by the management of the company Prices are determined by demand and supply for the securities There is no fixed geographical location. It is located at specified places further (new issues of securities by existing companies to investors). directly (or between investors. The company is not involved through an intermediary). OR • (b) (i) Growth opportunities Companies having good growth opportunities retain more money out of their earnings so as to finance the required investment. • 28 Dividend in growth companies is therefore, smaller than that in the non growth companies. • (ii) Cash flow position Availability of enough cash in the company is necessary for • declaration of dividend. This is important because the payment of dividend involves an outflow of cash. • (iii) Stock market reaction Stock prices react positively to the news of increase in dividend • and share prices react negatively to decrease in dividend. Thus, the possible impact of dividend policy on the equity share price has to be considered. • (iv) Access to capital market Large and reputed companies depend less on retained earnings to finance their growth as they have easy access to • the capital market. Such companies pay higher dividends than the smaller companies which have relatively low access to the market.

which results in increase in fixed capital requirements.
Distinguish between 'Primary Market' and 'Secondary
Market' on the basis of any six points.

Marking-scheme solution

More from Financial Markets

Primary market	Secondary market
There is sale of securities by new companies or further (new issues of securities by existing companies to investors).	There is trading of existing shares only.
Securities are sold by the company to the investor directly (or through an intermediary).	Ownership of existing securities is exchanged between investors. The company is not involved at all.
The flow of funds is from savers to investors, i.e. the primary market directly promotes capital formation	It enhances encashability (liquidity) of shares, i.e. the secondary market indirectly promotes capital formation
Only buying of securities takes place in the primary market, securities cannot be sold there	Both the buying and the selling of securities can take place on the stock exchange
Prices are determined and decided by the management of the company	Prices are determined by demand and supply for the securities
There is no fixed geographical location.	It is located at specified places