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In a nutshell, primary and secondary markets are two different forms of capital markets. Organisations’ securities, equities, or debt instruments are traded in these markets. One line separates these markets: all the equities, guarantees, or debts are first distributed or, say, created in primary markets. Whereas secondary markets are aftermarkets, these markets function as the trading platform for all the previously issued assets. Before moving further, look at precisely what the ‘Capital Market’ is.
Capital Markets: The capital market is the platform where distribution or listings of all securities are offered to business organisations and individuals for a long-term generally which have a locked-in period (1 year or >1 year). Also, the Government is allowed to participate in the market by issuing bonds rather than not permitted shares or equities.
Primary Markets
The first form of the capital market, Primary markets, is where a firm’s securities are bought for the first time. Primary markets directly bridge the issuers to investors. It is the first place where the firms collect the capital from the public, dropping the private firm status. Owing to which primary market is also known as New Issue market. Mainly, the primary market operates on the protocol of one year liquidity lock-in period. In simpler words, any liquidity invested anywhere in the primary market can’t be extracted from the market. Bonds, debentures, equity shares, and IPOs (Initial public offerings) are the most common assets traded in the primary market. However, listings or offerings are issued in five ways.
Methods of offerings in Primary Markets
Issuance of prospectus – A page is issued officially reasoning the firm’s purpose behind fundraising along with its financial information and history.
Private placement – These offerings are listed for the general public via middle intermediaries. The lots of securities are purchased by central intermediaries who distribute fractions to the general public or organisations.
Preferential allotments –This can also be said as an offering for brokers. In these, securities are allotted to middle intermediaries at a special price who sell fractions securities to other individuals or organisations selected or permissible from an intermediary.
e-IPOs – When Initial Public Offerings are listed online or electronically, that listing can be termed e-initial Public Offerings. These IPOs have several rules. First and utmost importance is a firm cannot list securities through e-IPO on the exchanges where securities have been listed previously.
Right offerings (issue) – In these listings, the new shares by a firm are listed, and they are first listed for their current stakeholders before their issuance to the general public.
Secondary Markets
In the Secondary market, only previously issued equities can be traded. Owing to which it is also known as the ‘After market.’ Secondary Markets are the platforms where all equities are traded among investors only. In brief, the secondary market can be termed as the ‘Stock Market.’ Any stock exchanges, including NASDAQ, BSE, and NYSE, are secondary markets. Securities are traded as ‘shares’ of a company which depicts a fraction of the stake in a firm. Secondary markets don’t have any mandatory lock-In period, and any securities can be traded at any time. Unlike Primary markets, Secondary Markets are sub-classified into two classes, namely Auction markets, and Dealer markets.
Auction Markets
As the name suggests, auction of securities, or say shares take place in these markets. In these markets, all the investors and traders gather and bid or sell their securities for the finalised price.
Dealer Markets
Dealer markets are another form of the secondary market. In Dealer markets, Dealers purchase a lot of securities and regulate in a market digitally among networks. In brief, Dealers are at the top of these markets; every trade is made with them, be it buy or sell.
Difference between Primary and Secondary Markets
Conclusion
We can now say that Primary markets are the first markets where all the securities are first issued and then further traded in all secondary markets. The minimum liquidity lock-In period separates these markets. Primary Markets generally have a lock-in period of one or more than one year whereas, Secondary Markets have no specific lock-in protocols. Moreover, we also learned how new equities are issued under primary markets and the subdivisions of secondary markets.
