Difference Between Primary and Secondary Market

Edited by Diffzy | Updated on: September 24, 2022

       

Difference Between Primary and Secondary Market Difference Between Primary and Secondary Market

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Introduction

The securities market is the marketplace where you may purchase financial instruments, liabilities, and claims. Primary Market and Secondary Market are the two interrelated parts. Market. The former is a market where pre-issued securities are traded amongst investors, while the latter is a market where assets are provided for the first time for public offering. While the primary market allows companies to sell fresh securities to investors, the secondary market deals with securities already issued by the corporation. Before investing your hard-earned money in financial assets such as stocks, bonds, and commodities, you need to understand the distinction between the primary and secondary markets to use your funds better.

A primary market is a process by which a market becomes a source of securities. Securities are established in the market for investors to purchase. These securities are offered on stock exchange marketplaces so that firms and the government may give capital. The primary market's principal role is to enable the organization to deliver long-term finances. These monies are raised through the issuance of debentures. An IPO (Initial Public Offering) is a classic example of a leading market is an IPO (Initial Public Offering). An IPO is a procedure through which a firm offers equity in the name of the general public. A person must have prior knowledge of these markets before investing. The main purpose of the primary market is to sell newly issued shares. The secondary market is where a company's issued shares are traded between investors. In layman's terms, investors can buy and sell stock without the corporation's involvement. Auction markets, direct search markets, dealer markets, and broker markets are the four sectors of the secondary market. The NYSE (New York Stock Exchange), NSE (National Stock Exchange), and others are examples of the secondary market. The fact that the price varies often is one of the critical drawbacks of the secondary market. This might occasionally result in an instant financial loss.

 Primary Vs. Secondary Market

The term 'market' has a variety of connotations. The market, in simple words, is the total number of buyers and sellers in a specific location. The secondary market and the main market are two types of markets. Both names are distinct, and there are significant distinctions between them. The cost and price of a specific product influence demand and supply. The market might be virtual or actual. There are sellers and purchasers in the market, and the business people in the market are often competing. There are four major types of marketplaces. They are Perfect Monopoly Competition, Monopolistic Competition & Oligopoly.

The primary market is distinguished by its association with new enterprises. The primary market raises funds through public offerings, offering for sale, private placement, and right issues. As a result, cash is raised for funding firms and the government. The main market is where all transactions occur, with the secondary market arriving later. All traders benefit from the secondary market because it provides liquidity. Any investor or seller in need of funds can sell their assets to an unlimited number of purchasers. Any change in the securities causes price fluctuations in the market, and the market adjusts to the new securities' price. Furthermore, because of the enormous volume of transactions in the secondary market, transaction costs are lower than in the primary market.

Difference Between Primary And Secondary Market in Tabular Form

Table:  Primary Vs. Secondary Market
Parameters Of Comparison
Primary Market
Secondary Market
Definition
The primary market is the market for new shares.
The Secondary Market is the location where previously issued securities are exchanged.
Another Term
After Market
New Issue Market (NIM).
Purchasing Methods
Involves Direct Methods
Involves Indirect Methods
Financing
It provides money to both new and existing businesses for development and diversification.
It does not lend money to businesses.
Frequency
Investors can only invest once in the market since the frequency of buying and selling is limited.
The frequency of buying and selling, on the other hand, is rather high, allowing investors to trade as often as they want.
regulations observed
Companies that issue shares and debentures must adhere to all requirements.
Investors in the secondary market adhere to the rules established by stock exchanges and the government.
Demerit
The primary market's main drawback is that it is time-consuming and expensive.
The primary downside of the secondary market is that investors might suffer significant losses owing to price fluctuations.
Purchase Procedure
The purchasing procedure takes place in the primary market.
The issuing business is not involved in the purchase process.
Participation of the government
The government intervenes in the issuance of shares by a firm.
The government is not involved in the process.
Beneficiary
The corporation is the winner.
The investor is the winner.
Securities sales
Companies directly to investors
Purchased and sold by investors and traders

What Is Primary Market?

The main market is a location where firms bring a new issuance of shares to be subscribed by the general public in order to raise cash for long-term capital requirements such as growing an existing business or buying a new entity. It acts as a catalyst for the mobilization of savings in the economy. A public issue, an offer for sale, a right issue, a bonus issue, an issue of IDR, and so on are all examples of corporate issues.

The firm bringing the IPO is known as the issuer, and the procedure is known as a public offering. Many merchant bankers (investment banks) and underwriters are involved in the process, which allows shares, debentures, and bonds to be offered directly to investors.SEBI must register these investment banks and underwriters (Securities Exchange Board of India).

For example, bons Inc. employs five underwriting companies to assess its first public offering (IPO) financial parameters. The underwriters specify that the shares will be issued at a price of $15. Investors can then purchase the IPO straight from the issuing business at this price. This is the first chance for investors to contribute funds to a firm by purchasing its shares. The funds earned by the selling of shares on the primary market form a company's equity capital.

Primary Market Characteristics

  • New Issues: The main market is distinguished by the fact that it is related to new issues. As a result, the principal market is known as the (NIM) new issue market.
  • Place: The primary market is not a specific location but rather an activity of issuing, buying, and selling.
  • Floating Capital: Capital is raised in the primary market through public offerings, offering for sale, private placement, and right issues. This is how cash is raised to finance businesses and the government.
  • It comes before the secondary market: All transactions take place in the primary market first. The secondary market arrives considerably later.

Primary Offering Varieties

A rights offering (issue) allows corporations to raise additional stock in the main market after shares have already entered the secondary market. Current investors are given prorated rights according to the number of shares they presently possess, while new investors can invest in newly created shares.

Private placement and preferential allocation are two more forms of primary market sales for equities. Private placement enables businesses to sell directly to larger investors such as hedge funds and banks without making their stock publicly available. At the same time, preferential allocation provides shares to a small group of investors (often hedge funds, banks, and mutual funds) at a discounted price not available to the general public.

There are two kinds of public issues:

  • Initial Public Offering (IPO): A public offering made for the first time by an unlisted firm, which then registers its shares on a securities market, is known as an IPO.
  • Further Public Offer (FPO): A follow-on offering is a public offering made by a listed firm for the second time.

What Is the Secondary Market?

The secondary market is a sort of capital market where investors may exchange existing company shares, debentures, bonds, options, commercial papers, treasury bills, and other securities. The secondary market can be either an auction market, where securities are traded through the stock exchange or a dealer market, also known as Over The Counter, where securities are traded without utilizing the stock exchange's platform.

The securities are initially offered to the general public for subscription in the primary market. The firm receives the money, and the investors receive the securities; they are then listed on the stock exchange for trading. These stock exchanges are the secondary markets where the company's stock is traded the most.

An investor can trade securities on the stock exchange with the help of brokers who assist their clients in acquiring and selling stocks. Brokers are registered members of a recognized stock exchange where the investor trades their securities. The innovative trading technology allows the brokers to trade. In addition, the SEBI gives member brokers a certificate of registration, which allows investors to determine whether or not a broker is registered.

The secondary market is further divided into two distinct categories:

  1. Auction Markets - Individuals and organizations interested in trading securities assemble in an auction market and advertise the prices at which they are ready to buy and sell. The bid and ask prices are the terms for this. The assumption is that an efficient market will emerge by bringing all participants together and requiring them to publish their pricing openly. Thus, the optimum price for an item is not necessary to be sought because the convergence of buyers and sellers will result in mutually agreed pricing. The New York Stock Exchange is the most outstanding example of an auction market (NYSE).
  2. Markets for Dealers- On the other hand, a dealer market does not need parties to meet in a central area. Instead, market players are linked through computer networks. The dealers keep a secure inventory and are ready to purchase or sell with market participants. The disparity in the prices at which these dealers buy and sell assets is how they make money. The Nasdaq is an example of a dealer market, in which market makers, or dealers, give definite bids and ask prices at which they are ready to purchase and sell securities.

Secondary Market Liquidity Characteristics:

  • The secondary market offers liquidity to all traders. Any investor or seller in need of funds can sell their shares to as many customers as they like.
  • Adjustable Price: Any change in the securities market causes price fluctuations. The market adjusts the price of new securities.
  • Transaction Cost: Due to the enormous volume of transactions in the secondary market, transaction costs are pretty cheap.
  • Investors in the secondary market must adhere to all guidelines set out by the stock exchange and the government. Higher rules and regulations safeguard the security of investors' assets.

Main Difference Between Primary And Secondary Market in Points

  • A primary market is a market where new securities are launched for first-time investors. On the other side, a secondary market is a location where issued shares are traded among investors.
  • The corporation issues the stock, and the government becomes involved. But, at the same time, there is no government or corporate influence.
  •  A fresh issue market is referred to as the primary market. Alternatively, The aftermarket is the secondary market.
  • Shares are traded between corporations and investors.
  • The primary market offers funds for businesses seeking development and growth. The current Financing is not available on the secondary market.
  •  The intermediary procedure involves underwriters. Brokers are involved in the intermediate process in the secondary market, though.
  •  Prices in the primary market are stable and do not vary. On the other hand, because of demand and supply, prices on the secondary market fluctuate a lot.
  • The main market has a restricted number of items, such as IPOs and FPOs. The secondary market sells shares, debentures, warrants, derivatives, and other financial instruments.
  • The transaction is completed in the primary market. On the contrary, The corporation that issues the stock is not involved in the purchase.
  • Companies that issue shares and debentures must adhere to all requirements. The stock exchanges and the government set the regulations for investors in the secondary market.

Conclusion

Although not all of the actions that occur in the markets studied have an impact on individual investors, having a basic grasp of the market's structure is beneficial. The way securities are brought to the market and exchanged on different exchanges is crucial to how the market works. Imagine if there were no structured secondary markets; you'd have to search out other investors yourself to purchase or sell a stock, which would be a complex undertaking. Many investment scams center on assets with no secondary market because naïve investors might be duped into purchasing them. Markets and the ability to sell securities (liquidity) are often overlooked, yet without them, investors are left with few choices and might end up with significant losses. Therefore, when it comes to the markets, what you don't know might cost you, and a little education could save you money in the long run.


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"Difference Between Primary and Secondary Market." Diffzy.com, 2022. Fri. 09 Dec. 2022. <https://www.diffzy.com/article/difference-between-primary-and-secondary-market-346>.



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