NISM-Series-VI: Depository Operations · Introduction to the Indian Capital Market

Primary and Secondary Markets in the Indian Securities Market

Updated 11 October 2026 · Fact-checked

The securities market is where securities are issued and traded. In the primary market, an issuer sells new securities to investors and receives the money, so capital is raised. In the secondary market, investors trade existing securities with each other on exchanges, and the issuer gets nothing. It gives liquidity.

Understand Securities Market: Primary and Secondary Markets

A company or government needs money for long-term use. Savers have money to invest. The securities market connects the two. It turns savings into investment, and this is called capital formation.

The primary market is where securities are created and sold for the first time. The issuer sells shares or bonds to investors, and the money goes to the issuer. Common routes are an IPO (initial public offer, the first public issue by an unlisted company), an FPO (further public offer by an already listed company), a rights issue (offer to existing shareholders) and a private placement (offer to a select group). It is also called the new issues market.

The secondary market is where already issued securities are bought and sold among investors. It works through stock exchanges. The issuer is not a party to these trades and gets no money from them. Its main job is liquidity: an investor can sell and exit when needed. It also gives continuous price discovery, a market price shaped by demand and supply.

The two markets depend on each other. People subscribe to new issues more readily when they know they can sell later in the secondary market. A new issue usually becomes tradable after it is listed on an exchange. Listing is the link between the two markets.

Depositories matter in both. In the primary market, shares allotted in an issue are credited to the investor's demat account. In the secondary market, shares bought are credited and shares sold are debited in the demat account at settlement. This is why NISM-Series-VI begins with this topic.

Key formulas to remember

Primary market: Issuer → new securities → investor; money flows to the issuer; Examples: IPO, FPO, rights issue, private placement. Capital is raised here.
Secondary market: Investor ↔ investor through an exchange; no money to the issuer; Gives liquidity and price discovery. Trades happen in listed securities.
Link between the markets: Primary issue → listing → secondary trading; Listing makes new securities tradable on an exchange.
Capital formation: Savings → securities market → productive investment; The core economic role of the securities market.

How to solve Securities Market: Primary and Secondary Markets questions

Most questions ask you to classify a transaction or pick the correct statement. Use this method.

1Read the question and find who is selling the security.
2If the issuer sells new securities and receives the money, it is the primary market.
3If one investor sells to another investor, it is the secondary market, even if the security was bought in an IPO.
4Check the word used: IPO, FPO, rights and private placement point to primary. Stock exchange trading points to secondary.
5For a 'function' question, match: capital raising goes with primary, while liquidity and price discovery go with secondary.
6Eliminate options that say the issuer receives money from secondary trades, or that primary issues are only on exchanges.
7Pick the option that fits every part of the statement, not just the first part.

Quickest way: Who gets the money?

When to use it: Use it for any primary versus secondary classification question under time pressure.

Ask: does the money go to the issuer?
Yes means primary. No means secondary.
Then check the keywords: IPO, FPO, rights means primary; exchange trading means secondary.
Choose the option that matches and move on.

Common mistakes in Securities Market: Primary and Secondary Markets

Calling a trade of IPO-allotted shares a primary market transaction.
Students link the shares to the IPO they came from.
Fix: Judge by the transaction. Once shares are allotted, any later sale between investors is secondary.
Thinking the issuer receives money when shares trade on the exchange.
Students confuse the company with the seller.
Fix: In the secondary market the seller is an investor. The issuer gets money only at issue.
Treating a rights issue as a secondary market activity.
It involves existing shareholders, so it feels like trading.
Fix: A rights issue creates new shares and the company receives the money. It is primary.
Saying liquidity is the main function of the primary market.
Functions of the two markets get mixed up.
Fix: Primary: raising capital. Secondary: liquidity and price discovery.
Believing that primary market issues never involve a depository.
Students link the depository only with trading.
Fix: Allotted securities are credited to demat accounts, so depositories serve both markets.

Worked examples

Example 1

Mr Rao buys 100 shares of a listed company through his broker on a stock exchange from another investor. Which market is this, and does the company receive the money?

Show the solution

Identify the seller: another investor, not the company.
The shares already exist and are listed.
A trade of existing securities between investors is secondary market.
The money goes to the selling investor, not the company.

Answer: Secondary market. The company does not receive the money.

Example 2

Which of the following is a function of the primary market? (a) Providing liquidity to investors (b) Continuous price discovery through trading (c) Raising fresh capital for issuers (d) Allowing investors to exit by selling on exchanges

Show the solution

Options (a), (b) and (d) describe trading of existing securities.
Those are secondary market functions.
Option (c) describes the issuer selling new securities and receiving funds.
This is the primary market function.

Answer: (c) Raising fresh capital for issuers

Exam tips

Always ask who receives the money. It settles most questions quickly.
Memorise the list of primary routes: IPO, FPO, rights issue, private placement.
Remember that listing connects the two markets, and that depositories serve both.
Watch for options that look right but swap the functions of the two markets.
With negative marking in NISM-Series-VI, skip an option pair only after eliminating the clearly wrong ones, then answer.

Practice questions from Introduction to the Indian Capital Market

Securities Market: Primary and Secondary Markets in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Securities Market: Primary and Secondary Markets: frequently asked questions

What is the main difference between primary and secondary market?

In the primary market, issuers sell new securities and receive the money. In the secondary market, investors trade existing securities with each other. The issuer gets no money from secondary trades.

Is an IPO part of the primary market?

Yes. An IPO is the first public sale of an unlisted company's shares, and the company receives the funds. After listing, trading of those shares is in the secondary market.

What are the functions of the securities market?

It channels savings into investment, which is capital formation. It gives investors liquidity and price discovery. It also lets issuers raise funds.

Why does NISM-Series-VI cover primary and secondary markets?

Depositories hold securities in electronic form for both markets. You need to know how securities get credited after an issue and moved after trades.