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NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Introduction to Securities Markets

Overview of Securities Markets and the Financial System

Updated 11 October 2026 · Fact-checked

The financial system moves money from savers to those who need funds. The securities market is one part of it. In the primary market, issuers raise new capital by selling securities to investors. In the secondary market, investors trade existing securities with each other, which gives liquidity and price discovery.

Understand Overview of Securities Markets and Financial System

Every economy has people who earn more than they spend (savers) and people or firms who need more money than they have (borrowers). The financial system connects them. It includes banks, insurance companies, mutual funds, exchanges, depositories and regulators. Its job is to channel savings into productive investment.

Savings is income not spent on consumption. Investment is putting savings to work to earn a return. A bank deposit, a share and a bond are all investment choices. The securities market is the part of the financial system where securities such as shares, debentures and government bonds are issued and traded.

The securities market has two segments. The primary market is where securities are issued for the first time. Money goes from the investor to the issuer, for example through an IPO. The secondary market is where already-issued securities are bought and sold on exchanges. Money goes from one investor to another, and the issuer gets nothing from these trades.

The market performs several functions: it mobilises savings, lets issuers raise capital, gives investors liquidity (the ability to sell quickly), supports price discovery through demand and supply, and allows risk to be spread across many investors. SEBI regulates the securities market and protects investor interests. Exchanges and depositories provide the infrastructure.

For a PMS distributor, this is the base layer. Portfolio managers invest client money in securities. You need to know where those securities come from and where they trade.

Key formulas to remember

Primary market
Issuer ← money ← Investor (new securities issued)
Capital reaches the issuer. Examples: IPO, FPO, rights issue, private placement.
Secondary market
Investor ↔ Investor (existing securities traded)
The issuer receives no money. It provides liquidity and price discovery.
Savings and investment
Savings = Income − Consumption
Savings becomes investment when it is put into assets to earn a return.
Core functions of the securities market
Mobilise savings, allocate capital, provide liquidity, enable price discovery, spread risk
Exam options often swap these with functions of a bank or a regulator.

How to solve Overview of Securities Markets and Financial System questions

Most questions on this topic test definitions and the difference between the two markets. Use this method.

  1. 1Read the question and find the key action: issuing new securities, trading existing ones, or describing the whole system.
  2. 2Ask who receives the money. If the issuer receives it, think primary market. If another investor receives it, think secondary market.
  3. 3Match the keyword: IPO, FPO, rights issue and private placement point to primary. Stock exchange trading points to secondary.
  4. 4For function questions, link the option to one of the core functions: savings mobilisation, capital allocation, liquidity, price discovery or risk spreading.
  5. 5Remove options that describe a regulator's role, a bank's role or a tax rule, unless the question asks about them.
  6. 6Check absolutes such as always or only. Pick the option that is precisely correct.
  7. 7Confirm your choice by restating the sentence in your own words.

Quickest way: Who gets the money test

When to use it: Use it for any primary versus secondary market question when time is short.

  1. Ask: does the money go to the company or to another investor?
  2. Company gets the money: primary market.
  3. Another investor gets the money: secondary market.
  4. Cross out options that mix the two.

Common mistakes in Overview of Securities Markets and Financial System

  • Saying the issuer receives money when shares are traded on an exchange.

    Students think any share purchase funds the company.

    Fix: Only primary market issues bring money to the issuer. Secondary trades only change ownership.

  • Calling an IPO a secondary market activity because it ends in a listing.

    Listing and trading follow the IPO, which blurs the line.

    Fix: The IPO itself is the primary market. Trading after listing is secondary.

  • Treating savings and investment as the same thing.

    Both words are used loosely in daily life.

    Fix: Savings is unspent income. Investment is deploying that savings in assets for a return.

  • Assigning liquidity and price discovery to the primary market.

    Students link all market functions to raising capital.

    Fix: Liquidity and ongoing price discovery are mainly secondary market functions.

  • Confusing the roles of the regulator and the market.

    Both appear in the same chapter.

    Fix: SEBI regulates and protects investors. Exchanges and depositories provide trading and holding infrastructure.

Worked examples

Example 1

A company sells new shares to the public for the first time to raise funds for a plant. Which market does this transaction belong to, and who receives the money?

Show the solution
  1. The shares are being issued for the first time, so they are new securities.
  2. Sale of new securities is the primary market.
  3. In the primary market, money flows from investors to the issuer.
  4. So the company receives the money.

Answer: Primary market; the company receives the money.

Example 2

Which of the following is a function of the secondary market? (A) Raising fresh capital for the issuer (B) Providing liquidity to investors (C) Issuing new IPO shares (D) Allotting shares to applicants

Show the solution
  1. Options A, C and D describe issuing or allotting new securities, which are primary market activities.
  2. Option B describes the ability to sell existing securities quickly.
  3. Liquidity is a core secondary market function.
  4. Only one option fits.

Answer: (B) Providing liquidity to investors.

Exam tips

  • Expect direct definition questions. Learn the one-line definitions of primary market, secondary market, savings and investment.
  • Watch for options that attribute money flow to the wrong party. Use the who-gets-the-money test.
  • Read each option fully. NISM options often differ by a single word.
  • The XXI-A paper has negative marking of 10% of the marks for a question, so eliminate clearly wrong options and then answer if you can narrow it down.

Practice questions from Introduction to Securities Markets

Overview of Securities Markets and Financial System in other exams

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

Overview of Securities Markets and Financial System: frequently asked questions

What is the difference between primary and secondary market?

The primary market is where new securities are issued and the issuer receives the money. The secondary market is where existing securities are traded between investors, and the issuer receives nothing from these trades.

What are the main functions of the securities market in India?

It mobilises savings, helps issuers raise capital, gives investors liquidity, enables price discovery and allows risk to be spread. SEBI regulates it to protect investors.

How is the NISM XXI-A exam structured?

It has 100 multiple-choice questions of 1 mark each, with 2 hours to answer. The pass mark is 60%, and a wrong answer costs 10% of the marks for that question.

Is an IPO part of the primary or secondary market?

An IPO is part of the primary market because the company issues new shares and receives the funds. Trading of those shares after listing happens in the secondary market.