Where shares come from: the primary and secondary markets
The answer
The primary market is where a company sells new shares to the public for the first time, usually in an IPO. The secondary market is everything after that — you buying from another investor on the exchange. In the primary market the company or its early investors decide the price. In the secondary market the price decides itself.
Why this costs you money
An IPO feels like an opportunity. It is advertised like one. There is a deadline, an application window, and a story about growth.
Here is what is actually happening.
Somebody who has owned this company for years, who knows it better than you ever will, has chosen this month to sell part of it. They chose the price. They chose the date. They chose it after their bankers told them the market was in a mood to pay.
That is not a conspiracy. It is completely legal and completely rational. But notice the asymmetry. In the primary market, the seller controls the timing and the price. In the secondary market, you do. Everything else in this article follows from that one sentence.
The specific loss most people take: they assume their application money is funding the company's growth. Often it is not. It is being paid to an early investor who is walking out of the door, and the company receives nothing at all. You can check this in 60 seconds, and almost nobody does.
How it works
The primary market. A company issues shares that did not exist before. Investors pay, the company receives the money, and the number of shares in existence goes up. This is the only point at which buying a share gives the business any capital.
An IPO can also contain a second thing bolted on to it.
| Fresh issue | Offer for sale (OFS) | |
|---|---|---|
| Are the shares new? | Yes | No, they already existed |
| Who gets your money? | The company | The existing shareholder selling |
| Share count after | Goes up | Unchanged |
| What it signals | The company needs capital | Somebody wants out |
Most Indian IPOs are a mixture of the two, and the prospectus states the split. An IPO that is 90% offer for sale is not a fundraising. It is an exit, with your money as the exit route.
The secondary market. After listing, shares change hands between investors on the exchange. The company is not part of these transactions and receives nothing from them. When Reliance shares trade a million times tomorrow, Reliance the business is unaffected by every one of those trades.
This surprises people. If the company gets nothing, why does the share price matter to the company? Three reasons: it sets the price at which the company can raise more money later, it decides what the management's shares are worth, and it decides whether the company can be bought.
What it tells you, and what it does not
An IPO price tells you what a seller and their bankers believe the market will pay this month. It is a negotiated number, and it is negotiated by people whose job is to get the highest one they can.
It does not tell you what the business is worth. There is no rule that an issue price must be reasonable, and no regulator anywhere approves it. SEBI checks that the disclosures are complete. It does not check that the price is fair, and it says so explicitly in every prospectus.
Listing day performance tells you even less. A stock that lists 40% above the issue price tells you the issue was underpriced, or that the first day was crowded. Both are facts about the auction, not about the company.
The decision rule
Before you apply for any IPO, find 2 numbers in the prospectus.
1. How much is fresh issue, and how much is offer for sale? If most of it is an offer for sale, the company gets no capital and somebody is exiting. That is not automatically a reason to refuse. It is a reason to ask who is selling, and why now.
2. What are the "Objects of the Issue"? This is the section that says what the fresh money will be used for. "Repayment of borrowings" and "general corporate purposes" are very different from "3 new plants".
And then the harder discipline: nothing forces you to buy in the primary market. The same shares will be available on Monday, and every Monday after that, at a price nobody chose for you.
Try this now
Take any IPO from the last 2 years — one you applied for, or one you remember.
- Search for the company name plus "RHP" or "red herring prospectus". It will be on the company's website, on SEBI's site, or on the exchange's.
- Open the first page. It states the total issue size, then splits it into fresh issue and offer for sale. Write down both numbers.
- Calculate what percentage was offer for sale.
- Find the section titled Objects of the Issue — usually within the first 30 pages — and read the list.
- Now open your broker app and look at that stock's price today against its issue price.
What you should see. For a large number of recent Indian IPOs, the offer for sale is the bigger half. In some, the fresh issue is zero — every rupee went to selling shareholders and none to the business.
Do this for 3 IPOs and the pattern becomes hard to unsee. You are not being offered a chance to fund a company. You are being offered the other side of somebody's sale, at their price.
Three real cases
1. Paytm, November 2021 (India) — size is not safety The issue totalled about ₹18,300 crore, the largest Indian IPO at the time, at ₹2,150 per share — but only ₹8,300 crore of that was a fresh issue reaching the company. The other ₹10,000 crore, more than half, was an offer for sale by existing investors. The stock fell on listing day, kept falling, and was down roughly three-quarters from the issue price within a year. Nothing illegal happened. The price was simply set at what the market would bear in a hot month, and the month ended.
2. Life Insurance Corporation, May 2022 (India) — 100% offer for sale The LIC IPO was entirely an offer for sale. The Government of India sold a slice of its holding, and LIC the company received nothing. This was clearly disclosed. Retail investors were given a discount and the issue was heavily marketed as a chance to own India's largest insurer. It listed below its issue price. Every applicant could have known, from page 1 of the prospectus, that no capital was reaching the business.
3. Facebook, May 2012 (United States) — the same pattern in another market Facebook listed at $38 in one of the most anticipated IPOs ever. It fell below the issue price within days and took more than a year to recover. Investors who bought on the secondary market a few months later, at a price nobody had chosen for them, did extremely well. The business was the same business. Only the price-setting mechanism was different.
The question that resolves it
A novice looks at an IPO and asks: will it list at a premium?
An expert asks: who is selling, and what do they know about the timing that I do not?
The first question is a guess about a single day. The second one is answerable from a document that is free to download.
What would make this wrong
If IPO pricing were fair on average, then IPOs as a group would perform like the market as a group. Across many markets and many decades, the research finds something different: IPOs often jump on the first day and then underperform over the following 3 to 5 years.
The honest limits are real, though.
Some IPOs are genuinely good businesses at reasonable prices, and refusing all of them as a category is its own mistake. Companies with real capital needs — manufacturers building capacity, banks raising regulatory capital — use the primary market for exactly what it exists for.
And an offer for sale is not proof of anything. A venture fund with a 10-year life must return money to its own investors eventually. A promoter selling 2% to buy a house is different from one selling 40%. The number tells you where to look, not what to conclude.
In India
An IPO runs for at least 3 working days. You apply through ASBA, which blocks the money in your bank account rather than debiting it — the money only leaves if you get an allotment.
Applications are split into categories. Retail investors — applications up to ₹2 lakh — get a reserved share of the issue. If a retail category is oversubscribed, allotment is by lottery, so a large application does not improve your odds beyond 1 lot.
Two Indian specifics worth knowing:
- Anchor investors. Large institutions are allotted shares 1 day before the issue opens, at the issue price, with a lock-in. The list is published. Who anchored an issue is public information and it is more informative than most of the coverage.
- The grey market premium. An unofficial, unregulated price quoted before listing. It is widely reported and it is not a forecast of anything. It is a small, opaque market with no obligation to be right.
Companies also raise money after listing through rights issues, QIPs and preferential allotments. All of these create new shares, and all of them reduce your percentage of the company unless you participate.
In the United States
The traditional route is the same: a company files an S-1 with the SEC, investment banks build a book of institutional demand, and the shares are allocated. Retail investors historically got very little of a hot IPO, though several brokers now offer access.
Three differences matter.
- Direct listings. A company can list its existing shares without raising any money at all — no new shares, no bank setting a price. Spotify and Slack did this. The opening price is set by supply and demand on the first morning.
- SPACs. A shell company lists first, raises cash, then merges with a real business. This became very popular in 2020 and 2021 and produced heavy losses for many retail buyers. The structure lets a company go public with looser projections than a normal IPO allows.
- Lock-up expiry. US insiders are typically locked in for 90 to 180 days after listing. The expiry date is public and it is a known supply event.
Where they differ, and what that tells you
In India, retail participation in IPOs is enormous and allotment is a lottery. In the United States, retail allocation is small and demand is mostly institutional.
That produces a real behavioural difference. In India, an IPO is a mass-market event with television coverage, an application deadline and a widely quoted unofficial premium — everything designed to create urgency in somebody who has not read the prospectus.
What this tells you is where to be careful. The Indian retail investor is being marketed to far more directly than the American one. The defence is the same in both countries, and it is boring: the document is free, the split between fresh issue and offer for sale is on the first page, and the shares will still exist next month.
Carry this
- Primary market: the seller picks the price and the date. Secondary market: you do.
- Check the fresh issue against the offer for sale before you apply. It is on page 1.
- The same shares will be available next month, at a price nobody chose for you.