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IPOs and stock markets
Understand how the primary and secondary market trades during an IPO through a stock exchange
IPOs and stock markets
At a Glance
Initial public offerings (IPOs) are created by private companies and sold on the primary stock market to raise funds.
The secondary market is where listed shares are traded between investors at an agreed bid and ask price
An investor can invest in a stock market index via an Exchange Traded Fund or Unit Trust
The Stock Market
The stock market is a secure and regulated marketplace where participants come together to transact in shares and other eligible financial instruments such as exchange traded funds (ETFs), corporate bonds and derivatives based on stocks, commodities currencies and bonds.
In fact, the stock market serves 2 roles – the primary market and the secondary market.
PRIMARY MARKET
The primary marketplace is where companies issue and sell their shares to the public for the first time through the process of initial public offerings (IPO).
Private companies often use IPO as an avenue to raise capital needed for growth. The company divides itself into a number of shares e.g. 10 million shares and sells a part of those shares to common public at a price e.g. $5 a share. If the IPO succeeds, the company raises $50 million worth of funds and is officially listed as a public company on the stock exchange.
On the other hand, investors whose IPO applications are successful are now shareholders of the company. They will receive the shares and hold them in anticipation of rising share price and any potential income in the form of dividends.
This entire capital raising process is facilitated by a stock exchange e.g. Singapore Exchange, who receives a fee for its services from the company and its financial partners.
SECONDARY MARKET
The buying and selling of listed shares on a stock exchange constitutes the secondary market.
The stock exchanges serve as the trading platform and earns a fee for every buy and sell trade that occurs during market trading hours. They also assumed the responsibilities for ensuring:
Share prices in the secondary market are determined by the basic forces of supply and demand. For instance, when market sentiments are positive and investors believe the stock has growth potential and buys it, the stock price will typically rise. On the contrary, if a company is not performing as well, its stock price may decline just as its demand dwindles.
Comparison between Primary Market vs Secondary Market:
| Primary Market | Secondary Market | |
|---|---|---|
| A marketplace where new shares are created and sold from issuer via IPO, to investors | Meaning | A marketplace where listed shares are traded between investors |
| Only once | How many times can the shares be sold? | Multiple times |
| Company | Who will gain from the sale of shares? | Investors |
| Fixed price | Price | Fluctuates depends on the demand and supply force |
Often, the stock exchange creates market-level and sector-specific indicators as an indicator of the overall stock market or sector’s performance, for example the Straits Times Index.
The Straits Times Index
The STI is a market capitalisation-weighted stock market index and is made up of the top 30 largest and most liquid companies listed in Singapore. This means that changes in the market value of larger companies move the index more than that of the smaller ones.
While the index does not cover all the stocks traded on the SGX, the 30 stocks are relatively large that they account for more than half the market capitalisation of the SGX Mainboard and are hence a reasonable performance indicator of Singapore’s stock market.
The STI is jointly constructed by Singapore Exchange, Singapore Press Holdings and FTSE and the constituents are reviewed on a quarterly basis.
Investing in an Index
You can’t invest in an index directly, but you can buy an Exchange Traded Fund or Unit Trust that tracks the index – a popular choice amongst investors for portfolio diversification, in a cost-efficient manner.
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