Primary vs Secondary Market: How IPOs Work

What you'll learn

  • The difference between the primary market and the secondary market
  • What an IPO is and why companies go public
  • The full IPO journey: DRHP, price band, bidding, allotment and listing
  • How to apply for an IPO using UPI and ASBA
  • How the retail allotment lottery works, and the risks of chasing listing gains

Every share you can buy today was, at some point, sold by the company for the very first time. That first sale happens in one market; every sale after it happens in another. Understanding this split is the key to understanding IPOs — the events that make headlines whenever a popular company "goes public".

Two Markets, One Share

Picture a brand-new flat. When the builder sells it to the first owner, the money goes to the builder. When that owner later sells it to someone else, the money goes to the owner — the builder gets nothing. Shares work exactly the same way.

PRIMARY MARKETShares sold for the first time 🏭 Company 👥 Investors new shares₹ to company SECONDARY MARKETExisting shares traded on NSE/BSE 👤 Seller 👤 Buyer 🏭 CompanyCompany receives nothing —₹ moves between investors Primary market raises money for the company; secondary market gives investors liquidity

🏭 Primary Market

  • Company issues new shares
  • Money goes to the company (fresh issue)
  • Happens through an IPO, FPO or rights issue
  • Price is fixed or set within a price band
  • A one-time window of a few days

🔁 Secondary Market

  • Investors trade existing shares
  • Money goes to the selling investor
  • Happens daily on NSE and BSE
  • Price moves every second with demand and supply
  • Open every trading day, 9:15 am – 3:30 pm

Both markets need each other. Few people would invest in an IPO if they couldn't sell later, and the secondary market would have nothing to trade without companies first issuing shares. When you buy Reliance or HDFC Bank shares on your app today, you are almost always in the secondary market.

What Is an IPO?

An Initial Public Offering (IPO) is the first time a private company offers its shares to the general public. After the IPO, its shares are listed on NSE and/or BSE and can be traded by anyone.

Why do companies go public?

💰

Raise growth capital

Fund new factories, technology, expansion or acquisitions without borrowing.

🏦

Repay debt

Use IPO money to reduce costly loans and interest payments.

🚪

Give early investors an exit

Founders and venture funds can sell part of their stake.

⭐

Visibility & trust

A listed company gains brand recognition and stricter, more trusted disclosures.

Fresh issue vs Offer for Sale (OFS)

An IPO can have two parts, and the difference matters a lot:

  • Fresh issue: the company creates new shares. The money goes into the company to fund growth.
  • Offer for Sale (OFS): existing shareholders (founders, private equity funds) sell their shares. The money goes to them, not the company.
Pro tip: Always check the split in the offer document. An IPO that is mostly OFS means insiders are cashing out — not necessarily bad, but worth asking why they are selling.

The IPO Journey, Step by Step

Let's follow a fictional company, Kaveri Solar Ltd, a rooftop solar installer from Bengaluru, as it goes public.

1DRHPfiled with SEBI 2SEBI reviewobservations 3RHP + price band₹270 – ₹285 4Bidding3 working days 5AllotmentT+1 6Listing 🔔T+3 T = the day the issue closes for bidding The IPO journey: from filing papers with SEBI to the listing-day bell

  1. Hire bankers and file the DRHP

    Kaveri Solar appoints merchant bankers (book running lead managers) and files a Draft Red Herring Prospectus (DRHP) with SEBI. It describes the business, financials, risks, promoters, and how the money will be used.

  2. SEBI reviews

    SEBI studies the DRHP and issues its observations. The company must answer questions and make changes. The DRHP is public, so anyone can read it.

  3. RHP and price band

    The final Red Herring Prospectus (RHP) is filed and a price band is announced: ₹270–₹285 per share. The lot size is 52 shares, so one lot at the top of the band costs 52 × ₹285 = ₹14,820.

  4. Anchor investors and bidding

    A day before opening, large institutions called anchor investors commit to buying a part of the issue. Then the IPO opens to everyone for at least three working days.

  5. Basis of allotment

    After bidding closes (day T), the registrar works out who gets shares, usually on T+1. Shares are credited and money is unblocked for unsuccessful applicants by T+2.

  6. Listing day

    On T+3, Kaveri Solar lists on NSE and BSE. A special pre-open session discovers the listing price, and normal trading begins at 10:00 am on listing day.

Who Gets What? Investor Categories

In a typical book-built IPO, shares are reserved for different investor groups so that big institutions can't grab everything:

QIBs — up to 50%NII 15%Retail — 35% Qualified Institutional Buyers — mutual funds, banks, insurers, FPIs Non-Institutional Investors — individuals/companies bidding above ₹2 lakh Retail Individual Investors — individuals bidding up to ₹2 lakh Typical split for a profitable company's book-built IPO; some issues also reserve shares for employees or shareholders. IPO reservation: retail investors get a protected slice of the issue

As a beginner applying for less than ₹2 lakh, you're a Retail Individual Investor (RII). That 35% retail slice is protected for people like you.

How to Apply for an IPO (UPI + ASBA)

Applying is surprisingly simple once you have a demat account (Lesson 4). The money does not leave your bank account when you apply. Thanks to ASBA (Application Supported by Blocked Amount), it is only blocked, and debited only if you get shares.

  1. Open the IPO section in your broker app

    Pick Kaveri Solar Ltd, and choose the number of lots (retail: up to ₹2 lakh total).

  2. Bid at the "cut-off" price

    Retail investors can tick cut-off, meaning "I'll pay whatever final price is set within the band". This avoids rejection if the final price ends at the top.

  3. Enter your UPI ID

    Applications up to ₹5 lakh can use UPI. You'll get a mandate request in your UPI app.

  4. Approve the mandate

    Approve it before the cut-off time on the last bidding day. ₹14,820 is blocked in your bank account — it keeps earning savings interest while blocked.

  5. Check allotment status

    Check on the registrar's website or the exchange site. Shares arrive in your demat by T+2, or the block is released.

Watch out: Unapproved UPI mandates are the #1 reason first-time IPO bids silently fail. Your application is incomplete until you approve the mandate in your UPI app.

The Retail Allotment Lottery

Popular IPOs are often oversubscribed — far more people apply than there are shares. SEBI's rule for retail is fair and simple: as many applicants as possible get at least one lot, chosen by a computerised lottery.

35,00,000
Retail shares on offer
67,307
Lots available (÷ 52)
4,00,000
Retail applicants
~17%
Your chance of 1 lot

This is why applying for 13 lots instead of 1 doesn't increase your chances much in a heavily oversubscribed retail category: winners usually get just one lot each. Many families apply from separate PANs and demat accounts for this reason.

Interactive: Work Through an Allotment

Open each step to work through Kaveri Solar's retail allotment yourself.

Step 1 — How many lots are in the retail portion?

Retail shares ÷ lot size = 35,00,000 ÷ 52 ≈ 67,307 lots.

Step 2 — How oversubscribed is retail?

Suppose 4,00,000 retail applicants bid for a total of 2.4 crore shares (most bid one lot, some bid more). Subscription = 2,40,00,000 ÷ 35,00,000 ≈ 6.9 times.

Step 3 — What are the odds for each applicant?

With 4,00,000 valid retail applications and 67,307 lots, roughly 67,307 ÷ 4,00,000 ≈ 16.8% of applicants win one lot each.

Step 4 — Priya wins one lot. What does she pay, and what if it lists at ₹330?

Final price ₹285 × 52 = ₹14,820 is debited. At a listing price of ₹330, her lot is worth ₹17,160 — a paper gain of ₹2,340 (15.8%) before charges. If it listed at ₹250 instead, she'd be down ₹1,820. Listing gains are never guaranteed.

Scenario: Primary or Secondary?

Decide which market each trade belongs to, then tap to check.

You get allotted 52 shares in Kaveri Solar's IPO
Primary — bought from the issue.
On listing day you buy 20 Kaveri shares on NSE
Secondary — bought from another investor.
A listed company offers existing shareholders new shares at a discount
Primary — a rights issue creates new shares.
You sell your allotted shares a month later
Secondary — the money comes to you, not the company.

IPO Myths vs Reality

❌ Myth

  • "IPOs always list at a profit."
  • "A high grey market premium guarantees gains."
  • "Oversubscription means the company is great."
  • "Bigger applications get more shares in retail."

✅ Reality

  • Many IPOs list below the issue price or fall later.
  • The grey market is unofficial and unregulated; it can flip overnight.
  • Demand can be driven by hype; always read the RHP.
  • In oversubscribed retail books, winners usually get one lot.
Important: Never pay anyone to "guarantee" an IPO allotment. Allotment is done by a computerised lottery supervised by the registrar and exchanges — nobody can influence it.

Quick Quiz

1. In which market does the company receive money from investors?

The primary market (for the fresh-issue portion). In the secondary market, money moves between investors.

2. What does ASBA mean for your bank balance?

The application amount is only blocked, not debited, and it is debited only if you receive shares.

3. An IPO closes on Wednesday. When does it typically list?

On Monday — T+3 working days (Thursday T+1, Friday T+2, Monday T+3), assuming no holidays.

4. What is an Offer for Sale (OFS)?

The part of an IPO where existing shareholders sell their shares. The proceeds go to them, not the company.

5. Why should retail applicants usually bid at the "cut-off" price?

So the bid stays valid whatever final price is set within the band, avoiding rejection if the price ends at the top.

Key Takeaways

  • The primary market creates new shares; the secondary market trades existing ones daily on NSE/BSE.
  • An IPO moves from DRHP → SEBI review → RHP and price band → bidding → allotment → listing on T+3.
  • Apply via UPI/ASBA — money is blocked, not debited, until allotment.
  • Retail investors (up to ₹2 lakh) have a reserved portion; oversubscribed allotments use a one-lot lottery.
  • Read the RHP, check fresh issue vs OFS, and never treat listing gains as guaranteed.