The securities market is a market where a variety of financial instruments, claims, and obligations are readily available for sale. The two interdependent segments of the Securities Market is Primary Market and Secondary Market. Even though both the Primary Market and The Secondary Market are two crucial parts of the Securities Market, they are fundamentally very different from each other. This blog is an attempt to help you understand different aspects related to both the markets and how they function.
What is the Primary Market?
The Primary Market is also known as the New Issues Market where companies, governments, or public sector institutions raise money by issuing equity-based or debt based securities to fulfill their long term capital requirement such as purchasing a new entity and expanding the existing business. Underwriting groups such as investment banks facilitate the operations of the Primary Market. It is the market where companies sell new bonds and stock publically for the first time.
What is a Secondary Market?
The Secondary Market is also known as the aftermarket. It is the Financial Market in which previously issued financial securities such as bonds, options, futures, and stocks are bought and sold. The secondary market is a highly liquid securities market. The securities traded in this market are previously issued securities without the involvement of the issuing company. London Stock Exchange, Nasdaq and New York Stock Exchange (NYSE) are some popular examples of a Secondary Market.
What is the Difference between Primary Market and Secondary Market?
While Primary Market and Secondary Market are vastly interdependent, and to some extent the two distinct and significant sides of the same coin, still there are several differences between the two markets that you should be aware of before investing in either of them. Some of the crucial differences between the Primary Market and Secondary Market are listed below.
- In the Secondary Market, the price of the securities is determined by the demand and supply of the securities. If the demand for security is higher than its supply, then the price of the security will be high and vice-versa. On the other hand in the Primary Market, the price of the securities are not dependent on the demand and supply of the securities. In the Primary Market, they are traded at a fixed price.
- In the Primary Market, the companies raise funds by issuing securities for fulfilling long-term financial goals such as expansion and diversification. In the Secondary Market, the issuing company has no involvement in the transaction.
- In the Primary Market, the securities that are traded are first issue securities. This means they have never been issued However, in the Secondary Market, the securities that are traded are of the second hand in nature, this means they have been issued publicly before at least once in the Primary Market.
- In the Primary Market, the parties involved in the transaction are the issuing company, investor and the investment banker. In the Secondary Market, the parties involved in the transaction are stock buyers, stock sellers, and
- In order to be listed on a recognized stock exchange market also known as the Secondary Market, it is mandatory that the security under consideration is formerly issued in the Primary market. However, the Vice-Versa is not mandatory.
- In the Primary Market, the securities have to be directly purchased from the company, whereas in the Secondary Market investors sell and buy the securities amongst themselves.
- Investment Bankers facilitate the purchase and sale of the securities in the Primary Market. However, in the Secondary Market brokers act as intermediaries between the buyers and the seller of securities.
- In the Primary Market, security can be sold only once. In the Secondary Market, it can be bought and sold an infinite number of times.
- When securities are sold in the Primary Market the company issuing the securities, it is an income for the company, however, when securities are sold in the Secondary Market the income earned is the income of the investors.
- Even though the Primary Market is rooted in a specific location, it has no organizational setup or geographical presence. However, the Secondary Market is physically present in the form of a stock exchange, and a stock exchange has a specific geographical presence.
- The five types of Primary Market issuances include Rights Issue, Bonus Issues, Preferential Issues, Public Issues, and Qualified Institutional Placement. On the other hand, Secondary Markets are divided into two types of markets-Dealer Market and Auction Market.
- The Primary Market is a direct market, and the Secondary Market is an indirect market.
- The Primary Market does not support bulk purchasing of securities, whereas, Secondary Market permits and promotes bulk buying and selling of securities.
- In Primary Market, the seller of the securities is the issuer of the securities, and in the Secondary Market, the seller of the securities is the holder of the securities.
- The issue of securities occurs relatively infrequently in the Primary Market. In the Secondary Market, securities are traded
- In a Primary Market, no listing is required. In the Secondary Market, only those securities are traded that are listed in the stock exchange.
No matter how different both Primary Market and Secondary Market are from each other regarding the number of transactions, market organization, beneficiaries, purchasing methods, intermediaries, and parties involved in the transactions, they both play a vital role in the mobilization of money in a country’s economy. A detailed understanding is required of both these markets and their interdependency to tactfully deal in these markets.