Class 11 FMM notes , chapter 2| Primary and Secondary Market notes

Hello guys, these are notes of class 11 FMM (Financial Market Management) .

Chapter 2 FMM notes class 11

 PRIMARY MARKET 

Provides the channel for sale of new securities.

provides the opportunities to issuers to raise resources to meet the requirements.

For shares original cost of stock shown on the certificate. For Bond it is the an amount paid to the holder at maturity.

When a security is sold above its face value it is said to be issued at a premium and 

if it is sold at less than its face value then it is said to be issued at a discount.

Why do companies need to issue shares to the public?

borrowings from banks may not be sufficient for setting the business over the long term 

so companies invite the public to contribute and issue shares to individual investors.

• When the shares of a company are offered to 50 or more investors it  is known as public issue.
• When the shares of a company are offered to 49 or less than 49 investors it is known as private placement.

What are the different kinds of issues?

• Public Issue
• Right Issue
• Preferential Issue/ private placement.

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Initial public offering:

When an unlisted company makes a fresh issue of securities for the first time to the public.

Rights issue: 

When a listed company proposes to issue fresh securities to its existing shareholders.

Preferential shares:

Already explained above (Private placement)

What is meant by issue price?

• The price at which a company's shares are offered initially in the primary market.

What is meant by market capitalisation?

The market value of company.

Current market price × no. of shares.

What is an Initial Public Offer?

The selling of securities to the public in the primary market.

Who decides the price of an issue?

The issue in consultation with merchant banker decide the price. SEBI does not play any role in price fixation.

What does 'price discovery through book building process' mean?

A mechanism where during the period for which the IPO is open,  bids are collected from investors at various prices, which are above or equal to the floor price.

What is the main difference between offer of shares through book building and offer of shares through normal public issue?

In case of offer of shares through book building.

Price at which securities will be allotted is not known.

Investors bid for shares at the floor price or above.

The demand can be known every day as the book is being built.

in case of offer of shares through normal public issue.

Price is known in advance.

The demand is known at the close of the issue.

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What is cut-off price?

The actual discovered issue price can be any price in a price band or any price above the floor price.

What is the floor price in case of book building?

Floor price is the minimum price at which bids can be made.

What is a Price Band in a book build IPO?

Within price band invested can bid.

The spread between the floor and the cape of the price band shall not be more than 20.

Who decides the price band?

Issuer with the consultation of merchant banker.

For 3 days a bid should remain open during book building. 

Open outcry system can not be used in the process of book building. 

Individual investors  can use the book building facility to make an application

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