Financial Terms: Definition & Role in Finance
Primary Market: Primary market is the new issue market of securities. This market brings together the “sources and use” or “supply and demand” for new capital funds. The main source of fund for the primary market is the savings of individuals and businesses. In a highly developed capital market, the largest portion of the individuals saving reaches the new issue market indirectly through financial intermediaries (Bhalla, 2005).
Role of primary market: In the primary market, Companies directly interact with the investors. Companies raise their new capital in the primary market through public issue and private placements. The basic instruments of raising capital through primary market are debt and equity. Sale of new securities is channeled through the primary market. Both the corporate and government can raise their capital through the issue of new securities. In the primary, market the securities may be issued at face value, premium or discount. The primary market allows the issue of securities in both domestic and international market (Pandey, 2007).
Thus, primary market is the market through which the risk capital of issuing company can be circulated. There is no commitment for the interest payment in this market and payment of dividend is also not compulsory and can be paid after fulfilling all kinds of overheads. Listed shares give the benefit of the liquidity to the shareholders. In short, the primary market plays an important role for the companies.
Secondary Market: The secondary market is the segment of the capital market, which deals the second hand securities, i.e. securities which are already issued by the companies and have listed in the stock-exchange. In the secondary market, the investors interact with themselves. The secondary market also includes the over- the-counter market and the derivatives market. The secondary market is also called Stock Market. The main instruments of the secondary market are equity shares, security receipts, government securities, commercial papers etc. (Pandey, 2007).
Role of Secondary Market: The secondary market determines the price and risk of the issued securities. It provides useful signals to both listed companies and investors to act in the primary market. In the secondary market, the common investors have an effective base for the purchasing and selling of their securities. In the companies, the secondary market performs activities to raise their share value (Bhalla, 2005).
Thus the secondary market encourages the individuals and institutions to purchase the new securities. The buyer of the financial securities gets marketability with an executable secondary market. Thus the existence of the firm secondary market raises the efficiency of the primary market (Horne, Wachowicz & Bhaduri, 2008).
Risk: Risk is defined as the variability of the actual return from the expected returns associated with a given asset/investment. The risk associated with the security is directly proportional to this variability. If the return from the asset is certain, there will be no risk. The risk associated with any asset or security has two components- Diversifiable and Non-diversifiable. The statistical measures of risk of an asset are Standard Deviation and Coefficient of Variation (Khan & Jain, 2002).
Role of Risk: The unsystematic risks are related to the specific firms such as strike and regulatory actions. These risks can be reduced through effective diversification. Whereas systematic risk arises due to the factors affecting all firms like war, political problems, inflation, etc. These risks cannot be ignored by the firms. All the risks associated with the market portfolio are systematic or unavoidable. Thus only non diversifiable risk is the applicable risk (Khan & Jain, 2002).
The investors in the market always prefer to invest in those securities which have highest return for a lower rate of risk or the lowest risk for a lower rate of return. Both the return and risk are measured in terms of expected value and standard deviation respectively.
Investment: Investment is one of the categories of fixed assets. Investment includes all those consumptions, which are expected to produce profits to the firm over a long period of time and comprehends both intangible and tangible assets. The investment refers to investing funds in the securities of another company. Investments are long term assets outside the business of the firm. The purpose of investment is either to earn return or/and to control another company. The investment decisions come under capital budgeting of the firm (Pandey, 2007).
Role of Investment: Investment opportunities are created or identified not occurs automatically. Investment ideas of most of the companies are generated at the plant level. In some countries, investment idea generation is done through a bottom-up process, while in others it is done through both-bottom up as well as top-down process. Once the investment proposals are identified they are submitted for scrutiny.
Thus investment decisions are important for the firm's long term growth. Investment affects the risk of the firm as it involves commitment of large amount of funds. Investments are reversible or irreversible at substantial loss. Thus investment and investment decisions are the most critical elements of a firm's growth.
Security: Securities which are also known as financial assets are financial tools like shares, bonds or debentures. Securities are issued to the investors by the companies in the primary capital markets to raise essential funds. The securities issued by firms are traded-bought and sold by investors in the secondary capital markets or stock exchanges. Securities include lease obligations and borrowings from banks, financial institutions and other resources.
Role of Securities:
Bhalla, V. K. (2005). Investment Management Security Analysis and Portfolio Management. (12th ed.). New Delhi: S. Chand & Company Ltd.
Pandey, I. M. (2007). Financial Management. (9th ed.). New Delhi: Vikas Publishing Houses Private Ltd.
Horne, J. C., Wachowicz, J. M. & Bhaduri, S. N. (2008). Fundamentals of Financial Management. (12th ed.). New Delhi: Dorling Kindersley (India) Private Ltd.
Khan, M. Y. & Jain, P. K. (2002). Financial Management. (3rd ed.). New Delhi: Tata McGraw-Hill Publishing Company Ltd.
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