The Market For Common Stock
A firm raises equity capital by selling stocks in a market. Similarly, investors who holds stocks need market to trade them. Common Stock is a security that represents ownership inside a corporation. Thus, a market is must for both issuing new stocks and trading outstanding stocks. Holders involving common stock exercising control by choosing a board involving directors and voting with corporate policy. The market for common stock can be divided into two types as primary market and secondary market.
(1) Primary Market
The primary market is the area of the capital market that relates to issuing of fresh securities. Newly established firm, privately held firms as well as publicly owned firms issue securities in primary market. It is a market that issues new securities by using an exchange. In a primary market, securities issued for the first time being traded. In other words, it is a ‘new issue’ market, where fund is raised through the sale of new securities to the investors. Primary market can be classified in to two types as follows:
- New public offering by closely held firms
A closely held firm can raise fund through initial public offering which is also a major part of the primary market. If a new firm is growing, usually the owners will want to take the company public with a sale of common stock to outsiders. This activity is known as going public. The market for the stock that is just being offered to the public is called the initial public offering (IPO) market.
- Additional shares sold by established publicly owned companies
An established, publicly owned company can sell additional shares in the primary market. It is possible if the number of issued shares are less than number of authorized shares.
(2) Secondary Market
The secondary market, otherwise known as the aftermarket, maybe the financial market where previously issued financial instruments including stock, bonds, choices, and futures are bought and available. Well established and publicly owned companies’ outstanding shares are actively traded in the secondary market. Secondary market deals in existing securities, as opposed to newly issued securities. The purpose of this market is to maintain liquidity in the stocks. Common stocks of small companies are not actively traded. Stocks of smaller public companies and closely held companies are traded in the over-the-counter (OTC) market. But the stock of larger publicly owned companies are generally traded on a organized stock exchange.