Primary vs. Secondary Market Differences

The securities are usually issued for the first time in the primary market, which then goes on to be listed on a recognized stock exchange to facilitate trading in the secondary market. The primary market tends to act as a funding source for new companies that want access to capital for expansion. The secondary market does not provide such scope but merely acts as a ready market for the securities.

What is the Primary Market?

When a company issues its shares for the first time to investors, the trade is said to take place in a primary marketPrimary MarketThe primary market is where debt-based, equity-based or any other asset-based securities are created, underwritten and sold off to investors. It is a part of the capital market where new securities are created and directly purchased by the issuer.read more. A company usually makes an IPO (Initial Public OfferInitial Public OfferAn initial public offering (IPO) occurs when a private company makes its shares available to the general public for the first time. IPO is a means of raising capital for companies by allowing them to trade their shares on the stock exchange.read more) when it goes on to sell its shares for the first time to the public. It is the market where securities like stocks and bonds are created for the first time for issuance.

The public issue is generally of 2 types.

  • IPO(Initial Public Offering): This is where an unlisted company issues its shares to the public for the very first time.FPO (Follow-on Public Offer): This happens when an already listed public company issues further sharesIssues Further SharesShares Issued refers to the number of shares distributed by a company to its shareholders, who range from the general public and insiders to institutional investors. They are recorded as owner’s equity on the Company’s balance sheet.read more to the general investing public.

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What is the Secondary Market?

If the investors then trade these securities among themselves, such a market is known as a secondary marketSecondary MarketA secondary market is a platform where investors can easily buy or sell securities once issued by the original issuer, be it a bank, corporation, or government entity. Also referred to as an aftermarket, it allows investors to trade securities freely without interference from those who issue them.read more. Various stock exchangesStock ExchangesStock exchange refers to a market that facilitates the buying and selling of listed securities such as public company stocks, exchange-traded funds, debt instruments, options, etc., as per the standard regulations and guidelines—for instance, NYSE and NASDAQ.read more like NASDAQ, NYSE, NSE, etc., list the prices of these securities daily to enable the investors to understand the price at which these securities can be bought or sold in the secondary market.

Example – Uber came up with its IPO in May 2019, with Morgan Stanley as the underwriterUnderwriterThe underwriters take the financial risk of their client in return of a financial fee. Market Makers like financial institution and large banks ensure that there is enough amount of liquidity in the market by ensuring that enough trading volume is there.read more, pricing each share at 45$ and managing to raise $8.1 billion. As of July 3rd, it trades at 44.23$ per share in the secondary market.

Primary Market vs. Secondary Market Infographics

Key Differences

  • In the primary market, investors can purchase the shares directly from the company. In contrast, they cannot do so in the secondary market as shares are now being traded among investors themselves.The prices in the primary market tend to be fixed during the new issue. In contrast, the secondary market fluctuates depending on the demand and supply for the concerned security.The amount received as proceeds from the sale of shares in the primary market is income to the company, but in the case of the secondary market, it becomes income to the investors.Usually, the investment banksInvestment BanksInvestment banking is a specialized banking stream that facilitates the business entities, government and other organizations in generating capital through debts and equity, reorganization, mergers and acquisition, etc.read more perform the role of underwriters to the issue and thus serve as middlemen in the issuance process in the primary market. Whereas in the secondary market, the brokers act as middlemen or intermediaries between investors.In the primary market, the security can be sold only once upon issuance. The secondary market has the advantage of having the stock sold off an infinite number of times among the investors.The primary market does not usually have any physical existence. On the other hand, a secondary market is set up as a stock exchange, usually in a particular geographical location.A company that wishes to raise capital has to undergo a lot of regulation and due diligence when it wants to sell its shares in the primary market. The secondary market does not warrant any sort of such requirement.

Comparative Table

Conclusion 

Through its primary and secondary markets, the stock market serves as an important source of funding for companies and helps mobilize funds. The primary market thereby helps do just the same by helping companies gain access to such capital.

Through its various exchanges, the Secondary market tends to serve as the barometer of the economy. Thus, it tends to reflect the country’s general health and economic conditions by providing a ready market to gauge the current investor sentiment.

This article is a guide to the Primary Market vs. Secondary Market. Here we discuss the top 9 differences between them, infographics, and a comparison table. You may also have a look at the following articles –

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