The capital market is a financial system where companies can raise money by issuing shares, bonds, debentures, etc. The primary market is where the securities are created for the first time. While the secondary market is the market dealing in securities that are already issued. Therefore, both the primary market and secondary market are a part of the financial markets.
Here, in this article, we will help you understand the primary market and secondary market and the difference between primary and secondary market.
What is a primary market?
The primary market enables the government, companies, and other institutions to raise money by issuing debt and equity-related securities in the market for the first time. The companies need new capital requirements to expand their existing business, for purchase of a new plant, for installation of a new entity, and much more. The new shares and bonds are offered to the public via Initial Public Offering (IPO). However, there are different types of issue securities, such as –
- Public issue
- Rights issue
- Issue of IDR
- Offer for sale
- Bonus issue
The issuer is the company that brings in the IPO, and this process is the public issue. The whole process includes underwriters, investment banks responsible for the direct sale of shares, bonds, and debentures to the investors.
Features of a primary market
The following are the features of primary market.
- The company raises money through the primary market to fulfil its long term capital requirements. Thus, fulfilling the long term capital need is a feature of the primary market.
- The primary markets deal with the fresh issue of securities. Therefore, any share, bond or debenture is first introduced in the primary market.
- Security is floated on the primary market before going to the secondary market. Hence it precedes the secondary market.
What is a secondary market?
The secondary market is a market where the existing shares, debentures, bonds, commercial papers, treasury bills, etc., trading happens among investors. Investors buy and sell securities in this market. The secondary market can be either an auction market or a dealer market. In the auction market, the trading of securities happens through the stock exchange. The dealer market is also known as Over The Counter (OTC). This where the transactions happen without using the platform of the stock exchange.
The securities are first offered in the primary market to the general public for subscription. Thereafter, the securities are listed on a stock exchange for trading in the market. The stock exchanges are the secondary market where the maximum trading happens. The two stock exchanges in India are the Bombay Stock Exchange and National Stock Exchange.
Features of a secondary market
The following are the features of secondary market.
- The secondary market provides liquidity to the investors. Therefore, investors can buy and sell the stocks anytime.
- In the secondary market, the transaction cost is low due to the high volume of transactions.
- Secondary market encourages new investment among investors.
- It also ensures the safety and fair trading for the protection of the investor’s interest.
- Furthermore, the secondary market helps companies to fulfil their short term liquidity needs. It facilitates the liquidity and marketability of existing shares.
Check Out FPO Meaning
Difference Between Primary market and Secondary Market. Primary Market vs Secondary Market
The difference between primary and secondary market primarily relates to the nature of financing and the organisations involved. The following basic differences between the two types of market –
The securities first issued in a market are referred to as primary market. However, when the company gets listed on the recognised stock exchange, the stocks are then traded in the secondary market.
The primary market is also known as the new issue market, whereas the secondary market is also known as the after issue market.
Pricing of security
The securities prices vary in the secondary market depending on the demand and supply of the securities. On the other hand, the price of the security in the primary market is fixed.
Financing to company
Primary market provides financing to new and old companies for the purpose of company expansion and diversification. On the contrary, the secondary market does not provide financing to companies as they are no transactions.
Exchange of securities
In the primary market, investors can buy shares directly from the company. Unlike the secondary market, where the buying and selling of securities (shares and bonds) happen among investors.
In case of the primary market, investment bankers take care of the selling of securities. Conversely, the stock broker is an intermediary while trading in the secondary market.
In the primary market, the company will gain from the sale of a security as a direct issuer. While in the secondary market, the investor gains/losses from the sale of securities.
Frequency of selling of securities
Under the primary market, one can sell a security only once, whereas, in the secondary market, security can be bought and sold an infinite number of times.
Amount from securities
The amount received from the securities in the primary market becomes the income for the company. However, the same is the income for investors in case of the secondary market.
How to identify investment?
Usually, the investors rely on the prospectus and word of mouth to pick an investment in the primary market. Whereas, there are several tools available for the investors to help them choose suitable investments in secondary market, such as price to earnings (P/E), price to book (P/B), price to sales (P/S) and more
In the primary market, the organisation does not have any specific geographical location or a particular place or any organisational setup. On the other hand, the secondary market has a physical presence as the stock exchange is situated in a specific geographical area.
Rules and Regulations
In the case of the primary market, the company issuing securities goes through a lot of regulation and due diligence. On the contrary, the investors and brokers need to follow the rules set by the exchange and governing body.
Both the primary market and secondary market play a crucial role in mobilising the savings of the people for the growth of the economy. An investor can benefit from both markets. However, both the markets come with their risks. Therefore, an investor must clearly understand the difference between primary and secondary market.