Get to know the Primary Market (IPO) and the Secondary Market

Types of Capital Markets – There are several investment instruments where people are more familiar with physical objects such as property or gold. However, not many people know about investment options through the capital market.

By choosing to invest using the capital market or capital market, it is not just giving the public an opportunity to make a profit. However, it also has an active role to improve economic conditions in the country.

The capital market is an activity related to public offerings and securities trading, public companies related to the securities they issue, and institutions and professions related to securities.

Meanwhile, according to Bruce Lloyd, the capital market functions as a liaison between investors and companies and government agencies through long-term trading of instruments such as stocks, bonds and others.

Types of Capital Markets

There are several types of capital markets. Based on the transaction time, the capital market is divided into the primary market and the secondary market.

1. Primary Market (IPO)

Quoting from the studiuangmu.ojk.go.id page, the primary market is the market where all securities or securities are traded for the first time to the public before being listed on the Stock Exchange. The primary market period is when shares or other securities are offered for the first time to investors (investors) by underwriters ( underwriters ).

Offers are made through securities brokers ( broker-dealers ) who act as stock selling agents. Well, this process is commonly referred to as an initial public offering (IPO).

Another popular term for the primary market is going public . The share price in the primary market is fixed. This is because the company has determined the price and number of shares to be offered before offering them on the primary market. Because the number of shares offered by the company is limited, it is not certain that all investors will get the amount they want.

It could be, investors get shares with a smaller amount than ordered, or even do not get at all. Especially if there is an excess of over-subscribed (excess demand). For example, the shares offered to the public through the primary market total 100 million shares. Meanwhile, the number of requests to purchase shares from all investors amounted to 150 million shares. Because it is oversubscribed (excess demand), investors can buy these shares on the secondary market.

Primary Market Characteristics

Quoted from the book Capital Markets and Portfolio Management (2011) by Mohamad Samsul, the main characteristics of the primary market are as follows:

  1. The issuer (securities issuer) sells shares to the public through an underwriter intermediary.
  2. The price offered is in accordance with the agreement of the two parties.
  3. Purchasers of securities are not charged a transaction fee.
  4. If there is an over-subscription (demand for shares is higher than the supply), the buyer may not necessarily receive the number of securities ordered.
  5. Investors buy shares (securities) through designated underwriters.
  6. Limited order period
  7. Offers to sell shares usually involve public accountants, notaries, legal consultants and appraisal companies.
  8. The primary market is often also referred to as the primary market ( primary market ) or the first market ( first market ).

Transactions of buying and selling of securities in the secondary market do not occur between investors and companies, but occur between one investor and another. After being listed on the stock exchange, it means that the company’s shares can be freely transacted by the public.

For example, investors who already have shares from transactions in the primary market, will usually sell these shares in the secondary market to get capital gains . Examples of transactions in the secondary market are stock transactions that we often do using online stock trading applications. It can be said that secondary market transactions are daily stock trading activities.

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2. Secondary Market

The secondary market is a continuation of the primary market. Simply put, the secondary market is a market where all securities that have been listed on the Stock Exchange are traded. The secondary market provides an opportunity for investors to sell or buy all securities listed on the Exchange after the implementation of the offering on the primary market (IPO). Transactions of buying and selling of securities in the secondary market are no longer taking place between investors and companies.

But between one investor and another investor. After being listed on the stock exchange, it means that the company’s shares can be freely transacted by the public. For example, investors who already have shares resulting from transactions in the primary market will generally sell these shares in the secondary market to obtain capital gains .

Transactions up to cash withdrawals at ATMs are examples of transactions in the secondary market where we often do stock transactions using online stock trading applications . It can be said that secondary market transactions are daily stock trading activities.

The difference between the Primary Market and the Secondary Market

Quoting from the Kompas.com page, the similarities between the primary market and the secondary market are that they are both a place to buy and sell shares or securities on the stock exchange. However, there are several differences between the primary market and the secondary market. Here’s the difference:

  • The price of shares in the primary market is relatively fixed, according to the issuer’s agreement with the underwriter, while the price of shares in the secondary market can fluctuate due to demand and supply of these shares.
  • There are no transaction fees in the primary market, on the contrary in the secondary market there are buying and selling transaction fees that are charged to investors.
  • The period for ordering shares on the primary market is limited while the period for ordering shares on the secondary market is not limited.
  • Transaction activities in the primary market are only for the purchase of shares while transactions in the secondary market are opened for the sale and purchase of shares.
  • Orders for shares in the primary market are made through intermediary selling agents, while orders for shares in the secondary market are made through stock exchange members.
  • Money from the sale of shares in the primary market will belong to the issuer (issuer), while money from the sale in the secondary market will belong to the securities or seller.

Capital Market History

Based on the book “Effectengids” which was published in 1939 by Vereniging voor den Effectenhandel, securities transactions have been going on since 1880, but were carried out without an official organization so that the records regarding these transactions were incomplete. In 1878 a company focused on community and securities trading was formed, namely Dunlop & Koff which became the forerunner of PT. Prime.

Only on December 14, 1912, Amsterdamse Effectenbueurs opened a stock exchange branch for the first time in Indonesia and was located in Batavia (now Jakarta). This capital market is the fourth oldest market for the Asian level after Tokyo, Hong Kong and Bombay.

Initially, the reason for the Dutch government setting up a stock exchange in Batavia was because at the beginning of the 19th century various plantations were being built on a large scale so that the development process could run well, so the Dutch colonial government of course needed capital. So one of the sources of capital he used at that time was savings from Europeans and also the Netherlands who had incomes above the average.

On this basis, on December 14, 1912, this stock market was officially established with the name Vereniging voor de Effectenhandel, which when translated into Indonesian, the name is the Securities Trading Association. This market is located in Batavia with securities traded in the form of stocks and bonds.

Capital Market Function

  • The capital market as a means of increasing capital for businesses

Companies can get funds by selling shares to the capital market. These shares will later be purchased by the general public, other companies, institutions, or by the government.

  • The capital market as a means of equal distribution of income
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After a certain period of time, all shares purchased will provide a share of the company’s profits (dividends) to the buyers or owners. Therefore, the sale of shares through the capital market can be considered as a means of equalizing income.

  • The capital market as a means of increasing production capacity

With additional capital obtained from the capital market, the company’s productivity will also increase.

  • The capital market as a means of creating employment

The existence of the capital market can encourage the emergence and development of other industries which have an impact on the creation of new jobs.

  • The capital market as a means of increasing state income

Each dividend distributed to shareholders will be taxed by the government and additional income through this tax will increase state revenue.

  • The capital market as an indicator of the country’s economy

The activity and volume of sales or purchases in the capital market which also increased solidly gives an indication that the business activities of various companies are running well and vice versa.

Capital Market Investment Instruments

The capital market is also often known as the stock exchange. In it, Sinaumed’s can find various types of securities that are traded every day. These types of securities include:

1. Stocks

Shares are securities that are proof of ownership of a company. Investors who have shares in a company, have the right to receive profit sharing or dividends.

2. Mutual funds

Mutual funds are known as investment instruments which are a place for collecting and managing funds from several investors. These funds are then managed by investment managers to be used as various kinds of instruments, such as money market, bonds, stocks, or other securities.

3. Debt or Bonds

Sinaumed’s can also obtain securities in the form of bonds in the capital market. Ownership of debt securities can be transferred, and the holder has the right to receive interest and repayment of debt at a predetermined period.

4. Exchange traded funds (ETFs)

This securities actually has similarities with mutual funds, both are collected collectively. It’s just that, EFT can be traded on the stock exchange like stocks.

5. Derivatives

Furthermore, there are also securities in the form of derivatives. These securities are known as derivative forms of shares. There are 2 types of derivatives that Sinaumed’s can find in the Indonesian capital market, namely warrants and rights.

Capital Market Benefits

The capital market has benefits for issuers, namely parties conducting Public Offerings, namely Securities offerings made by Issuers to sell Securities to the public based on procedures regulated in the applicable laws and regulations as well as for investors.

Capital Market Benefits for Issuers:

  • The amount of funds that can be raised is large
  • The funds can be received all at once when the primary market is over
  • There is no convenant so management can have more freedom in managing funds and the company
  • The company’s solvency is high so that it can improve the company’s image
  • The issuer’s dependence on the bank becomes smaller

Capital Market Benefits for Investors

  • Investment value develops following economic growth. This increase can be seen in the increase in stock prices which achieved capital gains
  • Receive dividends for those who own or hold shares as well as floating interest for bondholders
  • Can simultaneously invest in several instruments and reduce risk

Bonds As Profitable Investment Products

If new Sinaumed’s has the intention to make an investment, maybe Sinaumed’s can consider making bonds the best investment product. Indeed, bonds do not have the popularity of stocks as an investment product, but bonds can be used as a gateway for Sinaumed’s to start investing which can add to Sinaumed’s’ income while he is still productive at work.

As an introduction, bonds are an investment product that can be found in the capital market. Bonds are in the form of debt statements issued by related parties, usually coming from the government or corporations, but can also be issued by individuals. Bonds as the best investment product can also be applied to long-term and short-term investment types, because they usually have maturities ranging from 1 to 10 years.