The word market may have different meanings at different places, but when we are talking about the stock market it refers to both the primary market and the secondary market.
Knowing how the primary and secondary markets work is key to understanding how stocks, bonds, and other securities trades work. Without them, the capital markets would be much harder to navigate and much less profitable. This article will help you understanding the difference between primary and secondary market and their working.
Primary and secondary market : an introduction
Companies raise short term funds through the money market. But when the requirements are for long term, this is where the capital market comes in the role. The capital market comprises of primary and secondary market.
Now let’s understand in depth about the primary and secondary market and what the difference between primary and secondary market is.
Primary market is a place where securities are issued by the company for the first time to general public for raising funds in order to fulfill the long term capital requirement. Issues are made in various forms like public issues, offer for sale, rights issue, bonus issue, issue of IDR, etc.
Features of Primary market :
- The primary market is where securities are created. Fresh issue of securities takes place in primary market. It’s in this market that firms sell new stocks and bonds to the public for the first time.
- Primary market is a market for creation of long term capital.
- An initial public offering(IPO), is an example of a primary market.
- These trades provide an opportunity for investors to buy securities from the bank that did the initial underwriting for a particular stock.
- An IPO occurs when a private company issues stock to the public for the first time.
For example, company XYZ hires five underwriting firms to determine the financial details of its IPO. The underwriters detail that the issue price of the stock will be Rs.15. Investors can then buy the IPO at this price directly from the issuing company.
This is the first opportunity that investors have to contribute capital to a company through the purchase of its stock. A company’s equity capital is comprised of the funds generated by the sale of stock on the primary market.
A rights offering (issue) permits companies to raise additional equity through the primary market after already having securities enter the secondary market. Current investors are offered prorated rights based on the shares they currently own, and others can invest a fresh new in newly minted shares.
While secondary market is a place where existing securities like shares, debentures, bonds, options, commercial papers, treasury bills, etc. are traded amongst investors. It is like an auction market where the trading of securities is done through exchange or a dealer.
- the secondary market is commonly referred to as the “stock market.”
- The defining characteristic of the secondary market is that investors trade among themselves.
- In the secondary market, investors trade previously issued securities without the issuing companies’ involvement.
- Secondary market facilitates the liquidity and marketability of existing securities.
- Secondary market ensures a true and fair dealing for protection of the investor’s interest.
Basic difference between primary and secondary market
- The securities that are formerly issued in a market are referred to as primary market, whereas, when the company gets listed on a recognized stock exchange for trading, then the stocks are traded in secondary market.
- Primary market is also known as a new issue market and the secondary market is known as after issue market.
- Depending upon the demand and supply of the securities traded the prices in the secondary market vary. While in primary market the prices are fixed.
- The primary market provides financing to the new and the old companies for their expansion and diversification while the secondary market does not provide financing to companies as they are not involved in any transactions.
- In primary market the investors can purchase the shares directly from the company, whereas in secondary market, the investors buy and sell the securities among themselves.
- In case of primary market, investment bankers do the selling. Conversely in secondary market, the broker acts as an intermediary while the trading is done.
- In primary market, the company will gain from the sale of security. While in secondary market, investor will gain from the securities.
- The securities in the primary market can only be sold once, while in secondary market it can be done an infinite number of times.
- The amount that is received from the securities becomes the capital for company whereas; in case of secondary market same is the income of investors.