The term market in the finance world usually refers to both – the primary market and the secondary market. Both markets are part of the capital market. As the name suggests, the primary market is the space where securities are created. On the other hand, the secondary is meant for trading those securities. Capital markets are complex; thus, without having clear segregation, it becomes challenging to understand the concepts in-depth. One of the first steps to understand both the markets entirely is to know the difference between the primary market vs secondary market.
The market where a company raises capital for the first time is known as the primary market. Companies issue IPO (initial public offering) in the primary market only. The market offers an opportunity for investors to buy securities directly from the issuing company. By buying securities or stock from the primary market, investors help companies to raise capital. So, the overall capital that the company has on the balance sheet includes the contribution from the investors in the primary market.
Before the IPO, the issuer and the investment bankers carry out a marketing campaign, where they convince investors about the worth and potential of the investment. Generally, the prices are very volatile in the primary market because of abrupt demands. This is one reason why companies prefer to keep the price of the initial issue low.
A company can raise money from the primary market even after the securities list on the secondary market. A company can do so by issuing the right shares to the investors at a price lower than the prevailing secondary market price. This way, the company also rewards the investor for contributing to the company at an early stage.
Shares that the company issued in the primary market get listed on the secondary market. All the exchanges such as NYSE, NASDAQ, German DAX, Australian Stock exchange, and more come under the secondary market. Secondary markets allow retail investors to invest in the securities and earn a profit. Investors in the secondary market trade between themselves, and there is minimum or no interference from the issuing company.
We can further divide the secondary market into:
Auction Market – as the name suggests, it is the place where individuals and institutions come together and announce the buy and sell prices. The underlying idea is that there should be an efficient market that offers the opportunity to all the parties. Therefore, the mutually agreeable price between the buyer and the seller would be the best price to execute the trade.
Dealer Market –unlike the auction market, the dealer market does not require the parties to gather in a central location. Instead, all market participants participate through electronic networks. Dealers are in possession of the inventory of security and carry trade with the buyers or sellers. Dealers are known as the market makers as they compete among themselves and declare the best price to buy and sell the security. The underlying theory is that the competition between the dealers will offer the best possible price for the investors.
Primary Market vs Secondary Market
|Basis of Comparison||Primary Market||Secondary Market|
|Meaning||A platform that offers security for the first time is the primary market.||The market where investors trade already issued securities is known as the secondary market.|
|Another name||New issue market (NIM).||Aftermarket or share market.|
|Type of product||Products are limited and mainly include IPO and FPO (Follow-on Public Offer).||Many products, such as shares, warrants, derivatives, and more, are available.|
|Purchase type||All the purchases in this market happen directly.||The issuer (company raising capital) is not involved in the trading.|
|Frequency of selling||Security can be sold to the investors just once in this market.||Here the traders can buy and sell the shares as often they want.|
|Parties involved||The company and the investors are involved in buying and selling the security.||Here investors buy and sell the securities among themselves.|
|How to identify investment?||Investors primarily rely on prospectus and word-of-mouth publicity to pick an investment in the primary market.||Several tools are available to the investors to help them pick good investments, such as price to earnings (P/E), price to book (P/B), price to sales (P/S), and more.|
|Intermediary||Underwriters are the intermediaries in the primary market.||Here the intermediaries are the brokers.|
|Purpose||Help new and existing companies to raise capital for expansion and diversification.||It does not provide funding to companies; instead, it helps investors to make money.|
|Price||The company sells the shares to the investors at a fixed price.||Both buy and sell-side investors work toward finding the best price for the trade.|
|Presence||There is no organization set up for the primary market||There is a geographical setup and organizational presence for the secondary market.|
|Rules and Regulations||The company issuing securities goes through a lot of regulation and due diligence.||Here investors and brokers need to follow the rules set by the exchange and the governing agency.|
Both markets play a crucial role in mobilizing the savings of the people for the growth of the economy. Investors can benefit from both markets. However, both the markets come with their own inherent risks. So, investors must clearly understand the difference between primary market vs secondary market to profit from each.
Quiz on Primary Market vs Secondary Market
This quiz will help you to take a quick test of what you have read here.