Primary and Secondary Markets

When you hear the term market in the financial sense, it is an amalgamation of the primary and secondary markets. However, the term market is used in generic terms. Both primary market and secondary market are essential in the financial sector. To summarise the basics of the primary market, it is said to be the market in which securities are issued for the investors of the financial market. On the other hand, a secondary market refers to the market wherein the stocks are traded for public investors. It is made available to the public in the secondary market. It is crucial to understand how the primary and secondary markets function in the financial market. They help understand the working of the bonds, stocks, mutual funds, etc. 

What is the Primary Market? 

The primary market is the first step towards selling securities in the market. The securities are first created in this market. The new stocks, funds, and bonds are created for the first time in the private market. The IPO or Initial Public Offer is the first public issue of any securities in the market. Through this, the company provides an opportunity to the investors to subscribe to a particular company. An IPO is the perfect example of a primary market. An IPO takes place when a private company issues its securities in the market. The primary market is the first step of the investors so that capital is contributed to the company. 

What are the Various Types of Primary Offerings ? 

An issue permits raising additional equity through the primary market, and this is when an investor already has securities working in the secondary market. Some investors are given various rights of the stocks according to the rights they already own. Additionally, many can invest newly in the stocks.

The primary market offering includes preferential allotment and private allotment. Through private placement, the company has the right to share its stocks with the most selected people. Due to this, shares are not made publicly available but given to a section of potential buyers. However, preferential allotment makes the shares available to a selected group of people at a predetermined price. It is applicable for mutual funds, hedge funds, and even banks. These shares are not open publicly. 

Likewise, any businesses or government institutions that wish to generate funds will issue short-term and long-term bonds. The new bonds are issued at a new rate, and these rates are either higher or lower than the prices offered earlier. The primary market ensures that the securities are being offered directly from the issuer. 

What is the Secondary Market? 

The secondary market is also known as the stock market, which means that the secondary market includes the New York Stock Exchange, Bombay Stock Exchange, Nasdaq, and so on. It means that all the world’s main stock markets are included in the secondary market. 

In the secondary market or the stock market, there is no involvement of the company at all. The traders and investors invest and trade among themselves. For instance, if you were to invest in Tata Motors, the owner of Tata Motors will not be involved in trading your stocks, and the company will not be involved in the whole transaction. You’ll just be held accountable for the stocks that you have.

The secondary market is further divided into two categories. They are as follows: 

• Auction Markets 

You may already be familiar with this market. Through this, many individuals and organisations get together in an area. The prices of the objects up for sale are announced at this place, and the investors are asked to bid. An efficient market makes it at an auction party wherein potential buyers come together and the costs of the products are announced. Before the prices are announced, a price that is agreed upon by both the buyers and sellers is taken into consideration.

• Dealer Markets 

It is quite the opposite of the auction market. There is no need for a party or venue for the potential buyers to come together in the dealer market. The buyers or participants of the dealer market are connected through the electronic network. The dealers have the inventory with all the securities, and they can earn profits by buying and selling securities in the dealer market. For instance, the Nasdaq is a prime example of the dealer market.

Difference Between Primary Market and Secondary Market 

Conclusion 

The market is mainly divided into two main types: the primary market and the secondary market. The primary market is the creation of securities and is the first step that investors take before investing in the market. On the other hand, the secondary market is known as the stock market. Here, the buying and selling of stocks take place. In this, there is no direct involvement of the company in any way. The functioning of the markets in the financial system makes the whole system organised, systematic, and well-maintained. If it weren’t for the presence of these markets in the financial sectors, investors would have to go from place to place looking for stocks or bonds.