NISM-Series-X-A: Investment Adviser (Level 1) · Investing in Stocks

Primary Market, IPOs and Secondary Market Trading for NISM

Updated 11 October 2026 · Fact-checked

The primary market is where a company issues new securities and receives the money, through an IPO, FPO or rights issue. The secondary market is where investors trade existing securities on exchanges, with no money going to the company. Trades settle in demat form, on a T+1 cycle for equity.

Understand Primary Market, IPOs and Secondary Market Trading

Companies need long-term money. They raise it by issuing securities. This first sale of new securities is the primary market. The money goes to the issuer. The investor gets new shares.

An Initial Public Offer (IPO) is the first time an unlisted company offers shares to the public. A Follow-on Public Offer (FPO) is when an already listed company issues fresh shares to the public again. A rights issue offers new shares only to existing shareholders, in proportion to their holding, usually at a price set by the company. An IPO can have a fresh issue (new shares, money to the company) and an offer for sale (existing holders sell, money goes to the sellers).

In an IPO, the company appoints merchant bankers (book running lead managers), files offer documents with SEBI, and fixes a price band in a book-building issue. Investors bid within the band. The final price is the cut-off price discovered from the bids. Applications are made through ASBA, where the money stays blocked in your bank account until allotment. After allotment, shares are credited to your demat account and the stock gets listed.

Once listed, shares trade in the secondary market on stock exchanges such as NSE and BSE. Here investors buy and sell among themselves. The company gets nothing from these trades. The market gives liquidity and price discovery.

Shares are held in dematerialised form in a demat account with a depository participant of NSDL or CDSL. Trades on exchanges are cleared and settled by clearing corporations. Equity settlement in India runs on a T+1 rolling cycle: settlement happens on the next working day after the trade day (T).

Key formulas to remember

Primary vs secondary market: Primary: money goes to issuer | Secondary: money goes to selling investor; The most tested distinction. Listing and later trading belong to the secondary market.
Rights issue entitlement: Rights shares = existing shares × rights ratio; Example: ratio 1:5 means 1 new share for every 5 held. Offered only to existing shareholders.
Equity settlement cycle: Settlement day = trade day (T) + 1 working day; Rolling T+1 for equity in India. Shares are credited and debited in demat form.
Money raised in a fresh issue: Amount raised = number of new shares × issue price; Offer for sale proceeds go to selling shareholders, not the company.
Securities in demat: Demat account holds securities; bank account holds money; trading account places orders; Three linked accounts are used to trade equity.

How to solve Primary Market, IPOs and Secondary Market Trading questions

Most questions test who issues, who gets the money, and where the trade happens. Use this order.

1Identify whether the question is about new securities (primary) or existing securities (secondary).
2Name the instrument: IPO (unlisted company, first public offer), FPO (listed company, fresh public issue) or rights issue (existing shareholders only).
3Check who receives the money: the company for fresh issues, the selling holders for an offer for sale or any secondary trade.
4For pricing, note whether it is fixed price or book building, and whether the price is within a band or at cut-off.
5For trade questions, apply T+1 and count only working days, not holidays.
6For calculations, use number of shares × price, or existing shares × rights ratio.
7Check the demat angle: shares are credited to the demat account, ASBA blocks funds until allotment.
8Eliminate options that mix up the roles of the primary and secondary markets.

Quickest way: Who issues, who gets paid

When to use it: Use for conceptual MCQs where two options look similar, such as IPO vs FPO or primary vs secondary.

Ask: is the company unlisted? If yes, it is an IPO.
Ask: is the company already listed and issuing to the public? That is an FPO.
Ask: is the offer only to current shareholders? That is a rights issue.
Ask: does the company receive the money? Yes means primary market or a fresh issue.
If the trade happens on an exchange after listing, answer secondary market and T+1.

Common mistakes in Primary Market, IPOs and Secondary Market Trading

Saying the company receives money when shares trade on the exchange.
Students forget that listed trades are between investors.
Fix: Remember that only primary issues bring money to the company.
Treating a rights issue as open to all investors.
It sounds like another public offer.
Fix: Rights issue is only for existing shareholders in proportion to holding.
Confusing IPO with FPO.
Both are public offers of shares.
Fix: IPO is by an unlisted company for the first time. FPO is by a company already listed.
Counting holidays in the T+1 settlement day.
Students count calendar days.
Fix: Count working days only. A trade on Friday settles on the next working day, normally Monday.
Assuming offer for sale money goes to the company.
Students treat every IPO share as new.
Fix: In an offer for sale, existing shareholders sell and receive the proceeds.
Thinking ASBA debits your account on application.
Mixing it up with a normal payment.
Fix: ASBA only blocks the amount. It is debited on allotment and released if you get nothing.

Worked examples

Example 1

A shareholder holds 400 shares of a listed company. The company announces a rights issue in the ratio 1:5. How many rights shares is the shareholder entitled to, and who can apply?

Show the solution

Rights ratio 1:5 means 1 new share for every 5 shares held.
Entitlement = 400 ÷ 5 × 1 = 80 shares.
A rights issue is offered only to existing shareholders on the record date.

Answer: The shareholder is entitled to 80 rights shares. Only existing shareholders can apply.

Example 2

A listed company issues 10,00,000 fresh shares at ₹250 each through a follow-on public offer. How much does the company raise, and which market is this?

Show the solution

Amount raised = 10,00,000 × ₹250.
10,00,000 × 250 = ₹25,00,00,000.
The company is already listed and issues new shares to the public, so it is an FPO.
New securities are issued and money goes to the issuer, so it is the primary market.

Answer: The company raises ₹25,00,00,000 through an FPO, in the primary market.

Exam tips

Expect definition-style MCQs on IPO, FPO, rights issue and offer for sale. Learn the one-line difference for each.
Questions often ask who gets the money. Link it to fresh issue versus offer for sale.
Remember T+1 for equity and that settlement happens in demat form.
Read the question for the word listed or unlisted before choosing between IPO and FPO.
Negative marking is 25% of the question marks, so skip a doubtful 2-mark caselet option rather than guess blindly.

Practice questions from Investing in Stocks

Primary Market, IPOs and Secondary Market Trading in other exams

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

Primary Market, IPOs and Secondary Market Trading: frequently asked questions

What is the difference between primary market and secondary market?

In the primary market, a company issues new securities and receives the money. In the secondary market, investors trade existing listed securities with each other on exchanges. The company gets no money from secondary trades.

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

A rights issue is offered only to existing shareholders in proportion to their holding. An FPO is a fresh public offer by a listed company, open to the public.

How does the IPO process work in India?

The company files offer documents with SEBI and appoints merchant bankers. Investors bid through ASBA within a price band in book building. After allotment, shares are credited to the demat account and then listed on the exchange.

What does T+1 settlement mean?

It means a trade done on day T is settled on the next working day. Funds and shares are exchanged then, with shares moving between demat accounts.