Difference Between Primary Market and Secondary Market
- 5m0•
- 07 Oct 2023
Key Highlights
- The primary market is where new securities, like stocks and bonds, are first made available and sold.
- It's where companies, governments, and others get money by creating and selling these new securities for the first time.
- The secondary market is the place where people can trade securities that have already been issued.
In this article, let’s understand the difference between primary market and secondary market.
What is the Primary Market?
A primary market is where new securities are issued and sold for the first time. Stocks, bonds, or other securities are issued by companies, governments, or other entities to raise capital. By offering securities to the public or selected groups of investors, issuers can raise funds directly from investors.
Market conditions and demand determine the price of securities in the primary market. For stocks and bonds, the process of issuing securities is called an initial public offering (IPO). A company that issues an Initial Public Offering (IPO) sets the price of the stock, and investors can purchase it directly from the company or through underwriters.
Primary markets play an important role in the economy because they provide companies, governments, and other entities with funds for their projects, investments, and other activities. In the primary market, these entities can gain access to a large pool of investors and raise capital for growth and expansion.
What is a Secondary Market?
In the secondary market, previously issued securities, such as stocks and bonds, are bought and sold by investors. In the secondary market, investors can purchase and sell securities that companies, governments, or other entities have already issued.
During the secondary market, securities are traded between investors, and their prices are determined by supply and demand. As a result of the secondary market, investors have liquidity when they need to convert securities into cash or find better investment opportunities.
The secondary market must function properly in order to increase the efficiency and liquidity of the financial system by facilitating the transfer of securities between investors. In addition, it allows investors to adjust their portfolios and manage their risk exposure.
Secondary markets can be divided into two types: stock markets and bond markets. Bonds are traded on the bond market, while stocks are traded on the stock market. In both markets, investors buy and sell securities through intermediaries, such as stockbrokers or electronic trading platforms.
Primary Market vs. Secondary Market
Markets where securities are issued are called primary markets. A secondary market is formed when a company is listed on an exchange, and its stocks are then traded among investors.
A primary market is also called a 'new issue market' while a secondary market is called an 'after issue market.' Prices in the secondary market vary depending on the supply and demand of securities. However, primary market prices are fixed.
In the primary market, investors can buy shares directly from the company, whereas in the secondary market, they can buy and sell securities among themselves.
A primary market is where investment bankers sell their products. During secondary market trading, the broker acts as an intermediary.
Securities are sold on the primary market for the benefit of the company. Investors can gain capital appreciation from securities on the secondary market.
On the primary market, securities can only be sold once, while on the secondary market, sales and purchases are continuous. A company receives capital from securities, whereas a secondary market investor receives income from securities.
Primary market and secondary market play an important role in managing trade and contributing to the development of the economy. It is easier for companies to access funds and grow faster in countries with robust financial markets.
Difference Between Primary Market and Secondary Market
After understanding the primary market secondary market, let’s understand the difference between primary market and secondary market:
| Primary Market | Secondary Market |
|---|---|
In the primary market, new securities are created for the first time. | In the secondary market, investors buy and sell previously issued securities |
Companies, governments, and other entities are issuers. | An investor can be an individual, an institution, or another entity. |
It is intended to raise capital for the issuer. | Investors benefit from liquidity. |
Market conditions and demand determine the price of the securities | The price of a securities is determined by the supply and demand of investors. |
Investors and issuers are participants. | Investors who buy and sell securities among themselves are participants. |
Through IPOs or bond issuances, securities are offered to the public or selected groups of investors. | Investors trade securities through brokers or electronic trading platforms. |
It is regulated by SEBI. | A stock exchange or other regulatory body such as SEBI regulates the secondary market. |
Conclusion
The primary and secondary markets are essential to the functioning of the financial markets. New securities are issued by companies on the primary market while existing securities are bought and sold by investors on the secondary market. The primary market offers investors the opportunity to take part in IPOs or new issues, whereas the secondary market allows them to buy and sell existing securities.
Before investing, you should carefully understand the difference between primary market and secondary market. Kotak Securities can help you monitor investments regularly, research securities, and explain market conditions in order to make informed investment decisions.
FAQs on Primary Market vs. Secondary Market
What is the difference between primary market and secondary market?
A primary market is where securities are created, while a secondary market is where investors trade those securities.
Is NSE a secondary market?
Yes. All stock exchanges, including the Bombay Stock Exchange (BSE), National Stock Exchange (NSE), and bond markets are secondary markets.
What is an example of a primary market?
Primary markets are part of the capital market. Through the sale of debt and equity-related securities, governments, companies, and other institutions can raise additional funds. Notes, bills, government bonds, corporate bonds, and stocks of companies are some examples of primary market securities.
Is BSE a primary or secondary market?
BSE is the secondary market.
Why are primary and secondary markets important?
In a country's economy, both primary and secondary markets are crucial for the function of the economy. On the primary market, companies and investors directly interact, whereas on the secondary market, brokers facilitate stock transactions.
