Structure of Stock Market: IPO, FPO, QIP, OTC...

When I was a beginner in the stock market I used to understand the companies which are already listed but didn't know anything about how a company gets listed. Thanks to burning desire to learn and love for reading which got me to understand the structure of the stock market. The stock market has two very distinct but inseparable verticals which together completes the process.

We all know that the main purpose of the stock market is to provide a platform for companies to raise funds from the public/investors. 

Why would investors invest their hard-earned money? Simply for more money. 

How will investors get more money? By selling stocks at higher prices.

So now we have two major tasks one to provide a platform for promoters to sell their partial stake against his fund's requirements and another to provide a platform for investors to sell their stake when they want to. The first platform for promoters is called as Primary market and the second platform for investors to sell their stake or buy a stake in an already-listed company is called Secondary Market.

Primary Market

The primary market is used by companies to raise fresh capital through the issue of shares. This issue of shares may be public or private. In public issues, any individual or institution may participate, while private issues are open for only a selected group of people. The issue can either be an initial issue or a follow on the issue. Depending on these few terms come into picture like IPO, FPO. So let us understand these primary market terms.

Public Issue

If an issue is open for anyone eligible for investment then such an issue is called public issue. Anyone with a Demat account can apply for such an issue.

Initial Public Offering (IPO)

If a company is coming with is first public offering it is called an initial public offering. All the activities related to an IPO has to be done according to SEBI guidelines.

Follow on Public Offering(FPO)

If a company is already listed in stock exchanges and want to raise funds through shares issue it has to come with follow on public offer instead of the initial public offer. Companies may come up with FPO for various reasons such as funds requirement for growth, or debt payments or for increasing public participation as part of a regulatory requirement.

Private Placement(PP)

A private placement is one when the issuing company specifies a selected group of people who can apply for the issue. Only specified people can apply for such an issue hence it is called a private issue/private placement.

A private placement can be for qualified investors, employees, or existing shareholders of the company. Accordingly private placements can be QIPs, Preferential Issues, Rights, or Bonuses. 

Qualified Institutional Placement(QIP)

A qualified institutional placement is open for only Qualified Institutional Buyers(QIBs). QIBs include banks, financial institutions, and mutual funds. Such issues generally are wholesale issues of shares in large quantities.

Preferential Issue(PI)

Preferential Issues are nothing but a private placement where the selected group of people eligible for applying are stakeholders of the company. Stakeholders may be shareholders or employees of the company.

Rights Issue

When securities are issued to existing shareholders in a specific ratio to their current holding at a specified price which generally is lower than the market price(not necessary) then such an issue of securities is called a Rights Issue.

Bonus Issue

A bonus issue is very similar to the rights issue as it is also issued to existing shareholders in a specified ratio to their current holdings. The main difference is in pricing, while a rights issue is offered at some specified price bonus issue is offered at zero price. An investor already holding shares of the company coming with a bonus issue need not apply for the issue as the bonus shares get automatically credited to his account. 

For newcomers, the bonus issue seems attractive as they think we are getting more shares free of cost but in reality, the bonus issue does not add any value to an investor's portfolio. 

Secondary Market

A secondary market is a place that facilitates investors to buy or sell shares of already-listed companies. An investor who bought shares in an IPO from the primary market cannot sell it back in the primary market. He has to sell those shares through the secondary market. 

Most people who trade or invest in the securities market know the secondary market more than the primary market. The secondary market is broadly divided into two verticals.    

Over The Counter Market(OTC)

Over the counter market is a market where trades are negotiated among parties face to face over a counter. Such trades are settled directly between parties without the involvement of any exchange platform.   

Exchange-Traded Market

The exchange-traded market is where trades occur through an exchange platform and settlement is done by clearing corporations. In such case exchanges and clearing corporations take responsibility and guarantee settlement of trades.