Whether you are a beginner or a seasoned trader, you might have surely heard of the primary market and secondary market. Both are a type of capital market.
On the other hand, you must have a good knowledge of both the primary and secondary markets to understand how stocks, bonds, and other assets move.
Without a proper understanding, trading the stock markets would be much more difficult and less rewarding.
So, if you’re too wondering to learn more about the primary market and secondary market, read this guide till the end to get the complete information. Here is our guide on How to earn money in the share market daily.
What Is A Primary Market?
The primary market is a marketplace where securities are created. Companies offer to sell new stocks and bonds to the public for the first time in this market through an initial public offering or IPO.
Meanwhile, investors can acquire securities from the bank that handled the first underwriting for a particular stock through these trades.
When a private firm issues shares to the public for the first time, it is known as an IPO.
Key Features of A Primary Market:
- Fulfills the need of the company’s capital requirement
- High Liquidity
- Low Price Manipulation
- No Market Fluctuations
- No Need to Pay Brokerage or Transaction cost
5 Major Types of Primary Market Issuances:
The primary market issuances are classified into five major types. So let’s look at them closer!
- Initial Public Offering (IPO):
One of the most well-known ways to raise capital in the primary markets is through an initial public offering (IPO).
Meanwhile, the process through which a private business goes public by selling its stock to the general public is known as an initial public offering (IPO).
On the other hand, an IPO allows a company to raise equity capital by offering new shares to the general public.
- Preferential Issue:
A preferential allotment is when a corporation offers shares to a select people at a price that may or may not be connected to the market price.
Preference shareholders get dividends before regular shareholders in a preferred allotment. Meanwhile, the corporation determines the basis of allocation and is not based on pro-rata or any other method.
- Right Issue:
A rights issue is when a firm raises more capital from existing shareholders by issuing more shares at a lower price than the current market price.
Meanwhile, Investors have the option of purchasing these shares at a reduced price for a limited time.
- Bonus Issue:
In a bonus issue, the corporation gives current shareholders free, fully paid extra shares. Additionally, these shares constitute an incentive to the company’s existing owners. Meanwhile, bonus shares do not require additional capital to be issued.
- Qualified Institutional Placement (QIP):
A Qualified Institutional Placement (QIP) is a method of raising capital in which a firm issues equity shares, fully and partially convertible debentures, or any other instruments.
Additionally, Qualified Institutional Buyers are the only ones who can buy QIPs.
What Is A Secondary Market?
The secondary market, popularly known as the “After issue market,” is a marketplace where companies’ stocks can be purchased.
The market includes some of the major stock exchanges, i.e., the New York Stock Exchange (NYSE), Nasdaq, National Stock Exchange (NSE), and all other major stock exchanges across the world.
In the secondary market, traders exchange previously issued securities without the involvement of the issuing company.
For instance, if you want to purchase Tesla stocks, you’ll only be dealing with another Tesla shareholder. Meanwhile, it will not directly involve Tesla.
Key Features Of A Secondary Market:
- Offers High Liquidity
- Highly Regulated
- Follows The Primary Market
- Encourages New Investments
- Contribution to Economic Growth
Types of Secondary Markets:
The secondary market is divided into four major types: Stock Exchanges, OTC Markets, Auction Market, and Dealer Market.
- Stock Exchanges:
Stock exchanges are centralized marketplaces where buyers and sellers trade securities. Meanwhile, such platforms include the Bombay Stock Exchange (BSE), the National Stock Exchange (NSE), and the New York Stock Exchange (NYSE).
Additionally, the exchange is in charge of acting as a middleman between buyers and sellers. As a result of the exchange’s strict regulatory compliance, counterparty risk is nearly negligible.
- Over-the-Counter (OTC) Market:
The over-the-counter (OTC) market is a marketplace through which securities are exchanged informally. In addition, the OTC market is a decentralized market in which traders trade among themselves.
On the other hand, the OTC market comprises securities that do not meet the standards for a stock exchange listing. Additionally, it is a bilateral agreement between investors and dealers.
Meanwhile, smaller enterprises that cannot fulfill exchange standards for official exchange trade their stocks on the OTC market.
In the absence of regulatory control, the risk in this market is quite high. In addition, because there is fierce rivalry for increased volume, the price of securities may vary from one seller to another.
- Auction Market:
The auction market is a marketplace where buyers and sellers may negotiate the price at which securities will be sold.
Meanwhile, the pricing information, including the offer’s bidding price, is made available to the public.
- Dealer Market:
Another sort of secondary market is the dealer market, in which many dealers specify prices for certain securities for trades. Meanwhile, bonds and foreign currencies are exchanged primarily in this market type.
Key Differences in Primary Market and Secondary Market:
To get a better understanding of both capital markets, here are some of the key differences between the primary market and secondary market:
|Key Differences||Primary Market||Secondary Market|
|Meaning||It is a marketplace where securities are created.||It is a marketplace where traders trade previously issued securities.|
|Market Participants||Companies, Investment Banks, Investors, and Underwriters||Investors, Stockbrokers, and Traders|
|Intermediaries||Investment Bankers and Underwriting Firms||Brokerage Platforms|
|Price levels||Fixed||Change with Supply and Demand|
|Purpose||Fulfills the capital requirement of a company||Allow Traders and stockbrokers to earn profits|
|Validity||Securities can be traded for once||They can be traded for multiple times|
|Other Names||New Issue Market (NIM)||After Issue market (AIM)|
That’s it in this Primary market vs secondary market differences. Meanwhile, let’s move forward to the next section.
Importance Of Primary Market and Secondary Market:
While primary markets refer to new markets, secondary markets are considered resale markets. Meanwhile, understanding how these financial markets work helps investors to maximize their profit chances.
Both the primary and secondary financial markets play an important role in mobilizing capital for businesses that help economic progress.
Meanwhile, the stock market has various effects on an individual business in an economy. This is because a country’s economy and the stock market move in parallel.
When the stock market is functioning well, it typically indicates that the economy is expanding. This is because individual firms create more and typically expand when the economy grows.
Both the primary market and secondary market play a critical function in a market economy. Meanwhile, in today’s economy, a well-functioning capital market is essential for effectively transferring resources.
Who Trades in Primary Market and Secondary Market?
Primary and secondary market investors differ from one another because they have distinct expectations and financial objectives.
Meanwhile, secondary market investors can trade securities only after the primary market holders have sold them.
Conversely, in the primary market, Investors invest in firms by applying for an initial public offering (IPO), either for long-term investment or for listing gains.
On the other hand, traders and short/long term investors are among the secondary market investors.
The Bottom Line:
After going through this detailed and in-depth article about the primary market and secondary market, hope you understood the topic better.
Above, we have also listed the difference between the primary market and secondary market. On the other hand, both these capital markets involve high risk.
So, if you’re wondering about starting stock trading on the secondary market, there is no better place to start than InvestBy.
What Is The Example of a Secondary Market?
The National Stock Exchange (NSE), the NYSE, the NASDAQ, and the London Stock Exchange (LSE) are all examples of secondary markets.
What Is The Major Difference Between Primary Market and Secondary Market?
In the primary market, securities are created. Meanwhile, these securities are traded in the secondary market.
What Are The Four Types Of Secondary Market?
The four major types of secondary markets are Stock exchanges, OTC markets, Dealer markets, and Auction markets.
What Are The Types Of Primary Market?
The major types of the primary market include the primary stock market, the primary bond market, and the primary mortgage market.
What Is The Major Feature Of the Secondary Market?
The best feature of the primary market is that it offers high liquidity.