Financial Market Securities

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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- thecounter 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 componentsDiversifiable 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:
References
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.