Primary market versus secondary market

The main points of distinction between the primary and secondary markets

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The primary market is that part of the capital markets responsible for dealing with the issuance of new securities. Companies, governments or public sector institutions can obtain funding through the sale of a new stock or bond issue. Syndicate of securities dealers typically are the entities issuance goes through. Underwriting is the process of selling new issues to investors. In the case of a new stock issue, this sale is an initial public offering (IPO). A commission is added by Dealers and built into the price of the security offering, though it can be found in the prospectus.

Features of primary markets are:

•           This is the market for new long term equity capital. Securities are sold for the first time in the primary market. Therefore it is also called the new issue market (NIM(.

•           The securities are issued by the company directly to investors in a primary issue.

•           The company receives the money and issues new security certificates to the investors.

•           Setting up new business or expanding/modernizing the existing business are the purposes of primary issues.

•           The primary market performs the crucial function of facilitating capital formation in the economy.

•           The new issue market does not include certain other sources of new long term external finance, such as loans from financial institutions. Borrowers in the new issue market may be raising capital for turning private capital into public capital; this is known as "going public."

•           The original holder is the only one who can redeem the sold financial assets.

Methods of issuing securities in the primary market are

•           Initial public offering;

•           Rights issue (for existing companies)

•           Preferential issue.

The secondary market, which can be referred to as the aftermarket, is the financial market where previously issued securities and financial instruments such as stock, bonds, options, and futures are traded. The term "secondary market" refers to the market for any used goods or assets, or an alternative use for an existing product or asset where the customer base is the second market (for example, corn has been traditionally used primarily for food production and feedstock, but a second- or third- market has developed for use in ethanol production).

With primary issuances of securities or financial instruments, or the primary market, investors purchase these securities directly from issuers such as corporations issuing shares in an IPO or private placement, or directly from the federal government in the case of treasuries. However after the initial issuance, investors can purchase from other investors in the secondary market.

The secondary market for a variety of assets varies from loans to stocks, from fragmented to centralized, and from illiquid to very liquid. The major stock exchanges are the most visible example of liquid secondary markets - in this case, for stocks of publicly traded companies.

 

Article Tags: Primary Market, Secondary Market, Issue Market

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