NISM-Series-X-A: Investment Adviser (Level 1) · Introduction to the Indian Financial Markets

Primary Market vs Secondary Market for NISM X-A

Updated 11 October 2026 · Fact-checked

The primary market is where an issuer sells new securities to investors and receives the money, through an IPO, FPO or rights issue. The secondary market is where investors trade already issued securities on exchanges, and the issuer gets nothing. To answer exam questions, first ask who receives the money.

Understand Capital Market: Primary and Secondary Markets

Start with one question: who gets the money? If a company sells new shares and the company receives the money, that is the primary market. If one investor sells existing shares to another investor, the money goes to the seller, and that is the secondary market.

In the primary market, an issuer raises capital in three common ways. An IPO (Initial Public Offer) is the first time a company offers shares to the public. An FPO (Follow-on Public Offer) is when a company that is already listed offers more shares to the public. A rights issue offers new shares only to existing shareholders, in proportion to their holding, usually at a price that is a discount to market. An investor may take up the rights or renounce them, if the issue is renounceable.

In an IPO, the price is set by a fixed price method or a book building method. In book building, the issuer gives a price band, and investors bid within it. The final price, called the cut-off price, is found from the bids received. Investors apply through the ASBA facility, where the money stays in your bank account and is only blocked until shares are allotted.

Once shares are listed on a stock exchange such as NSE or BSE, they trade in the secondary market. Exchanges give liquidity and price discovery. Trades are cleared by a clearing corporation, which acts as the counterparty guarantor. Settlement means the buyer gets shares and the seller gets money. In India, equity cash market trades settle on a T+1 rolling basis, which means one working day after the trade day. Shares are held in dematerialised form with depositories (NSDL and CDSL).

The two markets depend on each other. A liquid secondary market makes investors willing to subscribe in the primary market, because they know they can exit later.

Key formulas to remember

Who receives the money: Primary market: money goes to the issuer. Secondary market: money goes to the selling investor.; This is the quickest test to separate the two markets in any MCQ.
IPO vs FPO: IPO = first public offer by an unlisted company. FPO = further public offer by an already listed company.; Both are public issues and both raise fresh capital for the issuer.
Rights issue: Offer only to existing shareholders, in proportion to shares held.; Example: a 1:5 rights issue gives 1 new share for every 5 held.
Book building: Price band, then bids, then cut-off price discovered from demand.; Contrast with a fixed price issue, where the price is stated upfront.
Settlement cycle: Settlement date = trade date + 1 working day (T+1) for equity cash market.; Settlement is on a rolling basis, so each day's trades settle after one working day.
Rights entitlement: New shares entitled = shares held × (new shares ÷ old shares in the ratio); Apply it to whole shares only. Fractions are handled as per the issue terms.

How to solve Capital Market: Primary and Secondary Markets questions

Use this method for any question on primary or secondary markets. It keeps you away from the trap options.

1Read the question and find the key action: a new issue of securities, or a trade in existing securities.
2Ask who receives the money. If it is the issuer, it is the primary market. If it is another investor, it is the secondary market.
3If it is a primary market question, identify the type: first-time public offer is an IPO, further public offer by a listed company is an FPO, and an offer only to existing holders is a rights issue.
4For pricing questions, check whether the issue is fixed price or book built. A price band and bids mean book building.
5For secondary market questions, think of the chain: trade on exchange, clearing corporation, settlement, and demat transfer through a depository.
6For settlement dates, count working days only. Skip weekends and exchange holidays.
7For calculation questions, write the ratio and the shares held, then multiply carefully.
8Eliminate options that mix up the two markets, or that give the issuer money from a secondary trade.

Quickest way: Follow the money in 10 seconds

When to use it: Use it for definition and comparison MCQs when you have little time and the options look alike.

Underline the issuer, the investor and the seller in the question.
If fresh securities are created, pick primary. If existing securities change hands, pick secondary.
Match the label: first offer is IPO, later offer is FPO, offer only to current holders is rights.
For settlement, add one working day to the trade date for T+1.
Reject any option that says the company receives funds from exchange trading.

Common mistakes in Capital Market: Primary and Secondary Markets

Saying the company receives money when shares are traded on the exchange.
Students link share price movement to company funding.
Fix: Remember that exchange trades are between investors. The company gets money only when it issues new shares.
Confusing an IPO with an FPO.
Both are public offers, so the names look similar.
Fix: Check whether the company is already listed. Not listed means IPO. Already listed means FPO.
Thinking a rights issue is open to all investors.
Students treat it like any other share sale.
Fix: A rights issue is offered only to existing shareholders in proportion to their holdings.
Counting calendar days instead of working days for settlement.
The T+1 label is read as simply the next day.
Fix: Count only working days. A Friday trade settles on the next working day, which is Monday if there is no holiday.
Treating book building as a fixed price method.
Students ignore the price band and bidding process.
Fix: In book building the final price is discovered from bids within the price band.
Assuming listing is the same as issuing.
The two events happen close together in an IPO.
Fix: Issuing raises funds in the primary market. Listing allows shares to trade in the secondary market.

Worked examples

Example 1

A shareholder holds 400 shares of a company. The company announces a rights issue in the ratio of 3 new shares for every 8 shares held. How many new shares is the shareholder entitled to, and is this primary or secondary market activity?

Show the solution

Find the number of sets of 8 shares: 400 ÷ 8 = 50.
Each set gives 3 new shares: 50 × 3 = 150.
The company is issuing new shares and receives the money, so this is primary market activity.

Answer: The shareholder is entitled to 150 new shares. It is a primary market activity.

Example 2

An investor buys shares on the NSE on a Thursday. There is no holiday that week. Under the T+1 rolling settlement cycle, on which day will the trade settle, and who receives the money paid by the buyer?

Show the solution

The trade day is T, which is Thursday.
Add one working day: the next working day is Friday.
The trade is on an exchange between two investors, so it is a secondary market trade.
The buyer's money goes to the seller, through the clearing corporation, and not to the company.

Answer: The trade settles on Friday. The seller receives the money, not the issuing company.

Exam tips

Look at the verbs. Words like issue, allot, raise capital and subscribe point to the primary market. Words like trade, buy on exchange and settle point to the secondary market.
For IPO versus FPO questions, find the listing status of the company before looking at the options.
In rights issue calculations, work with the ratio and the shares held. Cross-check by recomputing the result.
For settlement questions, count working days only and watch for a holiday in the question.
Remember that an X-A paper has negative marking of 25% of the marks of the question, so skip a question if two options still look possible after eliminating the clear traps.

Practice questions from Introduction to the Indian Financial Markets

Capital 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.

Capital Market: Primary and Secondary Markets: frequently asked questions

What is the main difference between the primary and secondary market?

In the primary market, the issuer sells new securities and receives the money. In the secondary market, investors trade existing securities among themselves, and the issuer receives nothing from these trades.

What is the difference between an IPO, an FPO and a rights issue?

An IPO is the first public offer by an unlisted company. An FPO is a further public offer by a company that is already listed. A rights issue is offered only to existing shareholders in proportion to what they hold.

How does settlement work in the Indian secondary market?

Equity cash market trades on exchanges settle on a T+1 rolling basis. The clearing corporation guarantees the trade, and the shares move in demat form through the depositories against payment.

Is listing the same as an IPO?

No. An IPO is the offer of shares to the public to raise funds. Listing is the admission of the securities to trading on a stock exchange, so they can then trade in the secondary market.