Primary and secondary markets

Markets are of several types. Each type of market has its purpose and characteristic features as well. To understand the working of these markets, we need to discuss these markets in detail. 

Whenever we talk about markets in terms of economics, two important names come up – primary and secondary markets.

Primary and secondary markets are important constituents of an economy and play a vital role in accelerating the economic activities in the country. 

Before we discuss the features and the importance of primary and secondary markets, let us discuss in detail what these markets are.

What is meant by primary and secondary markets?

A primary market is a part of the capital market. A capital market is a market where trade in bonds, stocks, etc. takes place. A primary market is therefore a market where the securities are created. A primary market deals with the sale and issuance of equity-backed securities to the investors directly by the customers.

A secondary market on the other hand is a market where the buyers purchase the securities from the investors instead of the companies issuing the securities themselves. 

What is the difference between primary market and secondary market?

The difference between the primary market and secondary market are:

• Primary markets are related to new issues. When a company issues its shares, it is known as Initial Public Offerings. Primary markets are primarily related to these new issues and offerings.

• Primary markets do not refer to a physical marketplace. When we talk about primary markets, we are referring to the concept of bringing these new issues into existence.

• Primary markets make way for the secondary markets. Primary markets are important parts of the capital market, which is a bigger picture in the market sense. 

• Primary markets have various parts of floating capital. A floating capital refers to the needs of a business for its immediate operations. Primary markets have various sources of floating capital.

The important features of secondary markets are:

1. Businesses often find themselves in the need of immediate cash for current operational needs. In such cases, secondary markets provide the businesses with funds. The most important feature of secondary markets is that it leads to liquidity in securities. This means that it converts the securities into cash.

1. Secondary markets attract a lot of investments since the rate of interest in securities keeps changing. Several investors enter the market to take advantage of this situation. This exploitation of the situation leads to new investors entering the market which ultimately leads to more investments.

1. A major distinguishing feature between the primary market and the secondary market is that, unlike the primary market, the secondary market has a legitimate physical space. This place is the Stock Exchange. Albeit, not all exchanges need to take place only through the stock exchange, it is a place where exchanges do take place making it a tangible marketplace.

1. The secondary market comes as a result of primary markets. No shares or securities are sold for the first time in the secondary market. This is how this market derives its name. This market is known as a secondary market because the securities traded in it and secondary products mean they are not being traded for the first time.

The Primary market and secondary market have some differences but they are both related as one gives way to another. 

Another very important topic these days are the offerings that are being made. As discussed above, primary markets engage in new issues and offerings. Let us discuss these new issues and offerings in detail.

What are the different types of company issues and offerings?

We have been hearing that the IPO of this company is out. Or, that company is bringing its IPO soon. What does this mean? We are about to know.

The different types of issues are:

• Initial Public Offering- the Initial Public Offering, also known as IPO is when a company is a process when a company decides to get listed on the stock exchange and publicly traded. 

• Follow on Public Order- the FPO process takes place after the IPO. The FPO is the offering of shares to the investors by a company that is publicly listed. In the case of FPO, the company goes to further issue the shares to the general public to diversify its equity base.

Conclusion:

We are sure that you have gained a good understanding of what primary and secondary markets are and how they are different from one another. We hope you will keep these in mind before you invest in a company now.