If a business is doing well, why would its owners sell parts of it to strangers? The answer explains the existence of the entire stock market, and it also explains why so many IPOs are priced against you.
Why a company sells shares
- To raise money without borrowing. A loan must be repaid with interest whether or not the business does well. Money raised by selling shares never has to be repaid — the new shareholders simply share in whatever happens next. For a company building factories or entering new markets, that is a much safer kind of money.
- To let early owners cash out. Founders and early investors may have had money locked in for a decade. Listing gives them a way to sell some of their stake to the public at a market-determined price.
- To get a public price tag. Once listed, the company has a visible market value, which makes it easier to acquire other companies using shares, to attract senior talent with stock options, and to borrow on better terms.
- Credibility. A listed company faces auditors, disclosure rules and analysts. That scrutiny is a burden, but it is also a signal to customers and lenders.
The primary market: an IPO
An Initial Public Offering is the one moment when money actually flows from investors into the company. You apply, shares are allotted to you, and your money goes into the business to build something. This is the primary market — new shares, created and sold for the first time.
The secondary market: everything after
The day after listing, something important changes. When you buy 10 shares of Zomato on the NSE, your money does not go to Zomato. It goes to whoever sold you those shares — another investor, possibly sitting in Coimbatore, possibly a fund in Singapore. The company receives nothing and is not involved.
When you buy a new car from a Maruti showroom, your money reaches Maruti and they build a car. When you buy that same car second-hand on OLX two years later, your money goes to the previous owner. Maruti gets nothing, and Maruti has no say in the price.
The IPO is the showroom. The stock exchange is OLX — a vast, extremely efficient second-hand market. More than 99.9% of all stock market activity is second-hand trading between investors, with the company watching from the sidelines.
Promoters and free float
In India, most listed companies still have a dominant owner — a founding family or a parent group — called the promoter. The Tatas hold about 72% of TCS. The Ambani family group holds around half of Reliance. Those shares exist and count towards ownership, but they are almost never for sale.
The portion that genuinely trades is the free float. It matters more than you would expect: it determines how easily you can buy or sell without moving the price, and it is what index providers use to decide a stock's weight in the NIFTY.
Reading the IPO frenzy correctly
- Read the Red Herring Prospectus — especially the "Risk Factors" and "Objects of the Issue" sections.
- Check what portion of the issue is fresh capital for the company versus an Offer For Sale, which is existing owners cashing out.
- Compare the asking valuation against already-listed peers you can verify.
- Be willing to skip it. There will be another one next month.
- Apply because the "grey market premium" is high.
- Apply because a WhatsApp group said it will list at a 40% gain.
- Never open the prospectus.
- Treat listing-day pop as the entire investment thesis, then hold indefinitely when it does not come.
You buy 100 shares of Tata Motors on the NSE today. Where does your money go?
Aapke chacha ki mithai ki dukaan chal padi. Ab woh 10 sheher mein kholna chahte hain, par bank itna loan nahi de raha. Toh woh logon se kehte hain — "paisa do, dukaan ke maalik ban jao." Yahi IPO hai. Company udhaar nahi le rahi, partner bana rahi hai — isiliye woh paisa wapas nahi karti, uske badle hissa deti hai.
- Companies sell shares to raise money that never has to be repaid, and to let early owners exit.
- The primary market (IPO) is the only time your money reaches the company.
- The secondary market — the exchange — is investors trading with each other; the company is not a party to it.
- Free float, not total shares, determines liquidity and index weight.
- In an IPO the seller picks the price and the timing. Act accordingly.
Mark it done to track your progress through the curriculum.
Common questions
Short, direct answers to what people ask about this topic.
- difference between primary market and secondary market
- In the primary market a company sells brand-new shares and the money goes to the company itself — an IPO is the classic example. In the secondary market you buy those same shares from another investor on the exchange, and the money goes to the seller, not the company. Every trade you place on NSE or BSE after listing is a secondary-market transaction.
- when I buy shares in an IPO who gets my money
- The company, in a fresh issue — the cash funds its expansion, debt repayment or working capital. In an offer for sale (OFS) component, that portion instead goes to existing shareholders or promoters who are selling down their stake. Most Indian IPOs are a mix of both, and the prospectus spells out exactly how much is fresh issue versus OFS.
- the market where new securities are issued for the first time is called
- The primary market. It is where a company raises capital directly from investors by issuing new shares or bonds, most visibly through an IPO but also through rights issues and follow-on offers. Once those securities list, all further buying and selling happens in the secondary market.
- what is free float in the share market
- Free float is the portion of a company’s shares that is actually available for the public to trade, excluding blocks held by promoters, governments and other strategic holders who do not routinely sell. A larger free float generally means more liquid trading, and Indian indices like the NIFTY 50 weight companies by free-float market capitalisation rather than total shares.
- who is a promoter of a company
- A promoter is the person or group that founded or effectively controls the company and is named as such in its filings — typically the founding family or parent group holding a large stake. Their shareholding is disclosed every quarter, and because they usually cannot sell freely straight after an IPO, a lock-in period restricts when promoter shares can be offloaded.