NISM-Series-VII: Securities Operations and Risk Management · Market Participants in the Securities Market

Securities Market Structure and Segments: Primary and Secondary Market

Updated 11 October 2026 · Fact-checked

The securities market has two parts. The primary market is where issuers raise fresh money by issuing securities to investors. The secondary market is where existing securities are traded among investors on exchanges. Trading is organised into segments: cash (equity), derivatives, and debt. To answer questions, first identify who gets the money.

Understand Securities Market Structure and Segments

The securities market is where securities such as shares, bonds, units of mutual funds and derivative contracts are issued and traded. It links people who have savings with entities that need funds.

It has two parts. In the primary market, an issuer sells new securities and receives the money. Examples are an IPO, a follow-on public offer, a rights issue and a private placement. In the secondary market, investors buy and sell securities that already exist. The issuer does not receive the sale price. The secondary market gives liquidity and price discovery, which in turn makes the primary market work.

The main instruments are equity shares (ownership), debt securities such as government securities, corporate bonds and debentures (a loan to the issuer), mutual fund units, and derivatives such as futures and options, whose value comes from an underlying asset like a share or an index.

Trading is organised into segments on a stock exchange. The cash (equity) segment trades shares and similar securities for settlement on a rolling basis. The derivatives segment trades futures and options on underlying assets, with a clearing corporation guaranteeing the trades. The debt segment deals in government and corporate debt. Government securities are traded on the exchange and also over the counter, and the exchanges run separate debt segments for corporate bonds.

Securities are also split by market type: the exchange-traded market with standardised contracts and a clearing corporation, and the over-the-counter (OTC) market where parties deal directly. Keep this link in mind: issue goes to primary, trading goes to secondary, and each segment has its own contracts and settlement.

Key formulas to remember

Primary market test: Money goes to the issuer → primary market; IPO, FPO, rights issue, private placement and preferential allotment all raise fresh capital for the issuer.
Secondary market test: Money goes to the selling investor → secondary market; The issuer's capital does not change. The market provides liquidity and price discovery.
Instrument classes: Equity = ownership; Debt = loan; Derivative = value derived from an underlying; Mutual fund units represent a share in a pooled portfolio.
Segment identification: Cash = shares delivered; Derivatives = futures and options; Debt = bonds and G-Secs; Match the product named in the question to its segment.

How to solve Securities Market Structure and Segments questions

Use this method for any question on market structure, segments or instruments.

1Read the question and underline the transaction or product named.
2Ask who receives the money: the issuer (primary) or another investor (secondary).
3Identify the instrument: equity, debt, mutual fund unit or derivative.
4Map the instrument to its segment: cash, derivatives or debt.
5Check whether the trade is exchange-traded or over the counter.
6Eliminate options that mix up primary and secondary features.
7Choose the option that fits the exact definition, not a loose description.

Quickest way: Who gets the money?

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

Find the word IPO, rights, FPO or private placement: it is primary.
Find the words exchange trading, buying from another investor or listed share trade: it is secondary.
For segment questions, match the product: futures or options mean derivatives.
Rule out any option that says the issuer receives money in a secondary trade.

Common mistakes in Securities Market Structure and Segments

Saying the issuer receives money when shares are traded on the exchange.
Students link any share purchase with the company getting funds.
Fix: In secondary trades, money passes between investors. Only fresh issue proceeds go to the issuer.
Treating a rights issue as a secondary market activity.
Existing shareholders are involved, so it feels like trading.
Fix: A rights issue creates new shares and raises capital, so it is a primary market activity.
Calling derivatives a separate asset that gives ownership of the company.
Futures and options are traded on shares, so they seem the same thing.
Fix: A derivative is a contract whose value depends on an underlying. It gives no ownership of the company.
Assuming all debt trades happen only on exchanges.
Equity trading is mostly on exchanges, so students carry that over.
Fix: Debt trades on exchanges and also over the counter. Remember that OTC is a valid route.
Mixing up equity and debt holders' rights.
Both are called securities.
Fix: Equity holders are owners. Debt holders are lenders with a claim to interest and principal.

Worked examples

Example 1

A company issues new shares to the public through an IPO. An investor later buys some of those shares on the exchange from another investor. Which statement is correct?

Show the solution

The IPO issues new shares and the company receives the money. This is the primary market.
The later purchase is between two investors on the exchange. The company does not receive the price.
So the exchange purchase is a secondary market transaction.

Answer: The IPO is a primary market transaction and the later exchange purchase is a secondary market transaction.

Example 2

An investor buys a Nifty index futures contract. In which segment is this contract traded, and what does it derive its value from?

Show the solution

A futures contract is a derivative, not a share or a bond.
Derivatives trade in the derivatives segment of the exchange.
Its value is derived from the underlying, which here is the Nifty index.

Answer: It is traded in the derivatives segment and derives its value from the Nifty index.

Exam tips

Most questions test one idea: who receives the money. Settle that first.
Learn the list of primary market routes: IPO, FPO, rights issue and private placement.
Do not guess when unsure. NISM Series VII has negative marking of 25% of the marks of a question.
Match each product to its segment by name. Futures and options mean derivatives.
Read options for words like always or only. Market structure rules usually have exceptions.

Practice questions from Market Participants in the Securities Market

Securities Market Structure and Segments 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 Structure and Segments: frequently asked questions

What is the difference between primary market and secondary market?

In the primary market, an issuer sells new securities and receives the money. In the secondary market, investors trade existing securities with each other. The issuer receives nothing from secondary trades.

What are the main segments of the securities market?

The main segments are cash (equity), derivatives and debt. Each deals with different products and has its own contract and settlement arrangements.

Is a rights issue part of the primary market?

Yes. A rights issue creates new shares and the company raises fresh capital, so it is a primary market activity.

How is NISM Series VII marked?

It has 100 questions for 100 marks in 2 hours. The pass mark is 50%, and wrong answers carry negative marking of 25% of the marks assigned to the question.