Security Market is divided into two types viz: Primary Market and Secondary Market.
PRIMARY MARKET
The market where the fresh issues of securities are made is called Primary Market.
Fabozzi, Modigliani, Jones and Ferri define primary market as the market dealing with financial claims that are newly issued. The primary market hence basically involves distribution of newly issued securities by government and its agencies, and various corporations. In the market place certain group called investment bankers work with issuers to distribute newly issued securities. Investment bankers are either securities houses or commercial banks. (2002)
Before 1976, Nepal Rastra Bank was the sole authority for managing the issue of short-term treasury bills and various types of development bonds to collect public debt for the Government. Since most of the economic activity concentrated in government the securities that were floated were generally government securities. But when Security Exchange Board was established in 1976 under the Companies Act with the joint capital contribution of Nepal Rastra Bank and Nepal Industrial Development Corporation, the institutional development of security market started in Nepal. The main objective of the establishment of the Centre was to mobilize public savings and encourage the people to participate in the ownership of industries and business enterprises. As a securities market intermediary, its role was to organize and provide marketing facilities of channeling securities exchange business through the centre. Its activities included the purchase, underwrite and sell, directly or through the licensed brokers or sub-brokers of the Centre, the shares, stocks and debentures of public limited companies and also development bond as well as Treasury bills issued by the Government.
Along with the formation of Security Exchange Board, His Majesty's Government converted the Securities Exchange Centre Ltd. into Nepal Stock Exchange Ltd. (NEPSE) in1993 with a view to reform the capital market. It is a non-profit making organization operating under Securities Exchange Act 1983. Brokers and market makers operate on the trading floor as per the Securities Exchange Act rules and bylaws of NEPSE. Nepal Stock Exchange started its trading operation on 13 January 1994 through its licensed member.
SECONDARY MARKET
The secondary market is a place where companies or dealers offer continuous bid and ask prices for outstanding securities. It is a place where already issued securities are traded.
Hence in secondary market the issuer of the securities does not get the funds from the buyer rather, the existing security changes hands and funds flow to seller of the security from the buyer of that particular security. The secondary market flows regular information about the values of the securities. The periodic trading clearly indicates to the issuer about the consensus price that its securities command in the open market. This information helps the issuer to assess the efficiency of fund utilization from earlier primary issue as well as the information regarding how receptive the investors would be to new offering. The secondary market also provides the opportunity for the original buyers of the security to reverse the investment by selling it for cash.
Many stocks are traded on major national stock exchange such as NEPSE of Nepal, Bombay Stock Exchange of India, New York Stock Exchange of USA, Nikkei of Japan, etc.
At the earlier stage the growth of secondary market of Nepal was very weak. The corporate bodies were required to list their shares and debenture in the SEC in order to qualify for the trading. However, the government bonds issued under the National Debt Act were exempted from such compulsory-listing obligation. Securities Exchange Act 1983 made it obligatory to trade the securities through the recognized Exchange Centre or through their licensed brokers. Therefore, the Securities Exchange Centre opened its floor for secondary trading of corporate shares in November 1984. Before this, the SEC was restricted to the trading of Government Bonds.
The rate of brokerage on equity transactions varies from 0.7 percent to 1 percent depending upon the volume of trade. Higher the amount of transaction lower is the percentage of commission. The seller and the buyer both the parties have to pay the commission to the broker.
