Often times, when someone says the word ‘market’, he or she refers to both primary and secondary markets. Yet, the primary and the secondary markets are different terms. The primary market is the market where the people create the securities, meanwhile, the secondary market is where investors trade those securities.
Once investors understand these two terms, they will have a better understanding of how to trade stocks, bonds, and other securities.
Differences Between Primary and Secondary Market
The primary market is where people create securities. This is where firms sell their new stocks and bonds for the first time, to the public. An example of a primary market is an initial public offering (IPO).
IPO happens if there is a private firm that issues its stock for the first time, to the public. Trades within this market allow investors to buy securities directly from banks that have done the initial underwriting for that specific stock.
It gives the opportunity for investors to contribute capital to the company, for the first time. After that, the company will have an equity capital, that tells the total funds they generate by the sale of stock on the primary market.
Companies are prohibited to raise additional equity in the primary market once they enter the secondary market.
Other types of the primary markets for stock offerings consist of preferential allotment and private placement. In the private placement. Companies can directly sell their stocks to more significant investors, such as banks and hedge funds.
- On the other hand, the preferential allotment gives the companies to choose their investors, such as hedge funds, mutual funds, and banks, at a special price. The red line of the primary market is it lets the securities to be purchased directly from the issuers.
If investors want to buy equities, they usually refer to the secondary market as the ‘stock market’. The example of that market is the New York Stock Exchange (NYSE), Nasdaq, and the other major exchanges.
The main characteristics of this market are that investors trade among themselves. They trade the previously issued securities without the involvement of the issuing companies.
