Functions of primary market

1. **Capital Formation:** The primary market facilitates the raising of new capital by companies
through the issuance of initial public offerings (IPOs). This capital is essential for business expansion,
development, and innovation.

2. **Market Entry for New Companies:** It provides a platform for new companies to enter the public
arena by issuing shares. This allows them to raise funds and establish a public presence.

3. **Investor Access to New Securities:** Investors can participate in the primary market to acquire
newly issued securities, offering them the opportunity to invest in a company during its early stages.

4. **Price Discovery:** The primary market helps in determining the fair market value of a security
through the process of price discovery. The initial pricing often reflects the perceived value of the
company.

5. **Facilitates Mergers and Acquisitions:** Companies can use the primary market to issue new
securities as a part of merger and acquisition strategies, helping them raise funds for such activities.

6. **Liquidity for Existing Shareholders:** Existing shareholders, including founders and early investors,
can sell their shares in the primary market, providing them with liquidity and an exit strategy.

7. **Corporate Visibility and Branding:** Going public in the primary market enhances a company's
visibility and credibility. It can contribute to building a strong corporate brand and attracting attention
from the investment community.
8. **Employee Stock Ownership Plans (ESOPs):** Companies often use the primary market to issue
shares to employees as part of employee stock ownership plans, aligning the interests of employees
with those of the company.

9. **Debt Issuance:** While often associated with equity, the primary market also deals with the
issuance of debt securities, allowing companies to borrow money by issuing bonds or debentures.

10. **Regulatory Compliance:** The primary market operates under regulatory frameworks to ensure
fair practices, investor protection, and transparency. Companies issuing securities need to comply with
regulatory requirements for public offerings.

Role of primary market and secondary market

**Primary Market:**

1. **Capital Formation:** The primary market plays a crucial role in capital formation by allowing
companies to issue new securities, such as stocks and bonds, to raise funds for various purposes,
including expansion and development.

2. **Market Entry for Companies:** It provides a platform for new companies to enter the market by
issuing Initial Public Offerings (IPOs). This allows them to raise capital by selling shares to the public for
the first time.

3. **Price Discovery:** The primary market helps in determining the initial price of securities through
the process of price discovery. This price is often based on factors such as company valuation, market
demand, and perceived value.
4. **Facilitation of Mergers and Acquisitions:** Companies can use the primary market to issue new
securities as part of mergers and acquisitions, enabling them to raise funds for strategic activities.

5. **Investor Participation:** It offers individual and institutional investors the opportunity to

participate in the early stages of a company's growth by purchasing newly issued securities.

6. **Corporate Visibility:** Going public in the primary market enhances a company's visibility and
credibility. This can attract attention from the investment community and contribute to building a strong
corporate brand.

7. **Allocation of Resources:** The primary market allocates financial resources by directing capital to
companies with growth potential, fostering economic development and innovation.

8. **Regulatory Compliance:** Companies issuing securities in the primary market must comply with
regulatory requirements to ensure transparency, fair practices, and investor protection.

**Secondary Market:**

1. **Liquidity Provision:** The secondary market provides a platform for buying and selling existing
securities, offering liquidity to investors who wish to sell or purchase shares without affecting the
company directly.

2. **Price Determination:** Prices of securities in the secondary market are determined by market
forces of supply and demand. This price discovery mechanism reflects the perceived value of the
security at a given point in time.

3. **Risk Management:** Investors can use the secondary market to manage their investment
portfolios by buying or selling securities based on changing market conditions and their risk tolerance.
4. **Exit Strategy for Investors:** The secondary market provides an exit strategy for early investors and
shareholders who can sell their holdings to other investors, thereby realizing gains or cutting losses.

5. **Market Efficiency:** Efficient secondary markets contribute to overall market efficiency by ensuring
that securities are fairly priced and that information is quickly reflected in market valuations.

6. **Borrowing and Lending:** Investors can engage in borrowing and lending securities in the
secondary market, facilitating short-selling and other trading strategies.

7. **Investor Confidence:** A well-functioning secondary market fosters investor confidence by

providing a transparent and organized platform for trading, reducing uncertainties associated with
illiquid markets.

8. **Contribution to Economic Growth:** The secondary market contributes to economic growth by

providing a mechanism for investors to channel funds into productive uses, supporting ongoing business
operations and expansion.

Types of negotiable instruments

Negotiable instruments come in various forms, each serving specific purposes in commercial
transactions. Here are the main types:

1. **Promissory Note:**

- A promissory note is a written promise by one party (the maker) to pay a specific sum of money to
another party (the payee) at a predetermined time or on demand.

- It is commonly used in various financial transactions, including loans and personal IOUs.
2. **Bill of Exchange:**

- A bill of exchange is a written order from one party (the drawer) to another (the drawee) to pay a
specified amount to a third party (the payee) at a designated time.

- Bills of exchange are often used in international trade transactions and can be transferred to others.

3. **Cheque:**

- A cheque is a written order from an account holder (drawer) to their bank to pay a specific amount to
the bearer or a designated payee.

- Cheques are widely used for everyday transactions and provide a secure means of payment.

4. **Bearer Instruments:**

- Bearer instruments are payable to the person possessing the physical document, making them
transferable by mere delivery.

- Examples include bearer cheques and certain types of bonds.

5. **Order Instruments:**

- Order instruments are payable to a specific person or their order, requiring an endorsement for
transfer.

- Promissory notes and order cheques are common examples.

6. **Certificate of Deposit (CD):**

- A certificate of deposit is a time deposit with a bank, representing a promise to pay a specified
amount to the bearer or a designated payee upon maturity.

- CDs are often used as a low-risk investment.

7. **Bank Draft:**
 - A bank draft is a written order by one bank to another to pay a specified sum to a third party. It is
similar to a cheque but is drawn by a bank.

- Bank drafts are often used for secure payments in transactions involving large sums of money.

8. **Money Orders:**

- A money order is a payment order for a pre-specified amount of money, usually issued and payable
at a post office or financial institution.

- It provides a secure means of transferring funds.

Understanding the characteristics and applications of each type of negotiable instrument is essential for
participants in financial and commercial activities.

Features of investment

1. **Return on Investment (ROI):**

- One of the key features of an investment is the potential for a return. Investors seek to generate
profits or income from their investments, and ROI reflects the percentage increase in value over the
initial investment.

2. **Risk and Reward:**

- Investments inherently involve risk. The relationship between risk and reward is crucial – higher
potential returns often come with higher levels of risk. Investors must carefully assess and balance these
factors based on their risk tolerance and financial goals.

3. **Liquidity:**

- Liquidity refers to the ease with which an investment can be bought or sold in the market without
significantly affecting its price. Highly liquid investments can be quickly converted to cash, providing
flexibility to investors.
4. **Diversification:**

- Diversification involves spreading investments across different asset classes, industries, or geographic
regions to reduce overall risk. It helps mitigate the impact of poor performance in a single investment on
the entire portfolio.

5. **Time Horizon:**

- Investments are often made with a specific time frame or investment horizon in mind. Some
investments may be short-term, aiming for quick returns, while others, like retirement funds, have a
long-term horizon, allowing for compounding and growth over time.

6. **Marketability:**

- Marketability refers to the ease with which an investment can be bought or sold in the market.
Investments in publicly traded securities, such as stocks, are generally more marketable than certain
private investments, enhancing their attractiveness to investors.