Understanding Primary vs. Secondary Capital Market | Espresso

Primary Market vs Secondary Market Explained

If you plan to step into financial markets to invest long-term, you have to strengthen the basics! And, if you are wondering where to start, you can understand the difference between the primary and the secondary market. It helps you make the right choices based on your income and financial objectives in life. So, let us get started.

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Before we understand the difference, let us know what the primary and secondary market means.

The capital market is a financial system in which companies raise funds by issuing shares, bonds, etc. It is divided into primary and secondary markets.

What is the Primary Market?

The primary market is the financial system wherein the companies, institutions, or the Government raises money by issuing shares in the market for the first time. It is based on the capital required to expand the business, merge another business, purchase a new plant, etc. For example,  the shares of private companies are introduced to the public for purchase through an Initial Public Offering.

Features of a Primary Market

  1. Raising money through the primary markets fulfils the companies' long-term capital needs.
  2. Handles new issues of securities and, therefore, precedes the secondary market.

What is the Secondary Market?

A secondary market is a marketplace wherein existing shares, bonds, etc., are traded. Investors engage in buying and selling of financial instruments. The secondary market can either be an auction market where the trading happens through a stock exchange or a dealer market where the trading happens with a stock exchange and Over-the-Counter.

The securities are first introduced in the primary market for subscription to the public. After that, the issued securities are listed in the stock exchange for investor trading and investment purposes. The Bombay Stock Exchange and The National Stock Exchange are the two secondary markets where the trading happens.

Features of the Secondary Market

  1. Investors in the secondary market can buy and sell anytime. Therefore, it increases the liquidity in the market among retail investors and helps companies fulfil their short-term liquidity needs.
  2. As the trades are higher in volume, the transaction costs are comparatively less in the secondary market.
  3. It is a fair trading platform that protects investors' interests.

Primary Market vs Secondary Market

The primary and secondary market differences are based on certain factors.

Factors

Primary Market

Secondary Market

Pricing

The price of the securities issued is fixed for all investors taking part in the offering.

The securities traded in the secondary market vary based on demand and supply.

Financing objectives

The primary market facilitates the financing requirements for companies looking to expand or diversify their businesses.

The secondary market does not essentially fulfil the financing needs of companies.

Nature of transaction

In the primary market, the investors can purchase shares directly from the companies.

In the secondary market, buying and selling of the shares happen among the investors.

Beneficiary

The company engaging in the initial public offering will benefit from the direct issue of the securities.

In the secondary market, the investors who buy and sell shares either gain or lose based on the price movement.

Intermediaries

Underwriters act as intermediaries in the primary markets.

The stockbrokers function as intermediaries among the investors in the secondary market.

Frequency of transactions

Issuing of particular securities happens only once in the primary market.

Buying and selling shares in the secondary market happens infinite times.

Evaluating investments

Investors purchasing shares in the primary market rely on the prospectus issued by the company that details the information on the issue of new shares.

The shares traded in the secondary market can be compared and evaluated based on different tools such as the price to earnings ratio, return on equity, return on investment, etc.

Rules and regulations

The company issuing the shares for the first time in the primary market must go through different regulations and due diligence to meet their capital requirements.

Investors and traders in the secondary market need to follow the rules prescribed by the governing bodies, such as the stock exchanges.

Conclusion

Both the primary and the secondary markets are essential for mobilising money in the country. The primary market helps investors engage with the company directly by purchasing the new shares introduced in the market. However, in the secondary market, the investors engage and trade among themselves for making profits.

The differences between the primary and secondary market are based on various factors such as pricing, nature of the transaction, beneficiaries involved, frequency of transactions, evaluating tools, intermediaries involved, and the basis of rules and regulations. By understanding these differences and your financial objectives, you can decide on the investment, whether to do it in the primary or the secondary market!

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Frequently Asked Questions

Securities in the secondary market can be bought and sold innumerable times.

Yes, a primary market can exist without a secondary market. However, an investor who has purchased the shares in the primary market will need a system to sell them when required. And the absence of a secondary market can discourage investors from purchasing new shares for this reason.

The primary and the secondary market are important for mobilising money in our country. For example, if you want to establish a direct contract with a company issuing new shares to the public, you can purchase the shares through the IPO.

On the other hand, if your financial objective is to purchase and sell shares to make short-term or long-term gains with no specific company, you can choose to invest in the secondary market.

Yes, the secondary market is otherwise called the after issue market. And the primary market is also called the new issue market.