Updated November 16, 2023
Difference Between Primary Market vs Secondary Market
The creation of securities occurs in the primary market. In this market, firms float new stocks and bonds to the public for the first time. An initial public offering, or IPO, is an example of a primary market. An IPO occurs when a private company issues stock to the public for the first time. The secondary market is commonly known as the stock market. The securities are first offered in the primary market to the general public for the subscription, where a company receives money from the investors, and the investors get the securities; after that, they are listed on the stock exchange for trading.
The financial market is a world where new securities are issued to the public regularly of various financial products and services tailored to the needs of every individual from all income brackets. These financial products are bought and sold in the capital market, split into the Primary Market vs Secondary Market. These are both different terms.
Primary Market
Investors trade securities with each other in the secondary market, while the primary market serves as the initial creation point of these securities. Various types of issues made by the corporation are Public issues, Offer for Sale, Right Issues, Bonus Issues, Issue of IDR, etc. The company that brings the IPO is the issuer, and the process is considered a public issue. The process includes many investment banks and underwriters through which the shares, debentures, and bonds can directly be sold to the investors.
For example, company XYZ Inc. hires four underwriting firms to determine the financial details of its IPO. The underwriter details that the stock’s issue price will be $20. Investors can then buy the IPO at this price directly from the issuing company. This is the first opportunity for investors to contribute capital to a company by purchasing its stock. A company’s equity capital contains the funds generated by the stock sale on the primary market.
Secondary Market
This includes the New York Stock Exchange (NYSE), NASDAQ, and all major global exchanges. The defining characteristic of the secondary market is that investors trade among themselves. In this market, existing shares, debentures, bonds, options, commercial papers, treasury bills, etc., of the corporates are trading amongst investors. The secondary market can be an auction market where traders trade securities through the stock exchange. In contrast, traders conduct trading away from the stock market platform in the dealer market, commonly known as Over The Counter.
For example, if you go to buy Amazon (AMZN) stock, you are dealing only with another investor who owns shares in Amazon. Amazon is not directly involved with the transaction.
While the primary market offers avenues for selling new securities to investors, the secondary market is the market dealing in securities that the company already issues. Before investing money in financial assets like shares, debenture, commodities, etc., one should know the difference between the Primary Market and Secondary Market to utilize savings better.
Primary Market vs Secondary Market (Infographics)
Below is the top 10 difference between the Primary Market vs Secondary Market:
Key Differences Between Primary Market vs Secondary Market
Both the Primary Market vs Secondary Market are popular choices in the market; let us discuss some of the major differences :
- The Companies initially issue securities in the Primary Market and then list them on a recognized stock exchange for trading, known as the Secondary Market.
- The prices in the primary market remain steady, whereas the prices vary in the secondary market depending upon the demand and supply of the traded securities.
- In the primary market, the investor can purchase shares directly from the company. In the Secondary Market, investors buy and sell stocks and bonds among themselves.
- In the primary market, one can only sell a security once, whereas in the secondary market, one can sell an infinite number of times.
- In the Primary Market, securities generate the company income, while securities earn investor income in the Secondary Market.
- The primary market is rooted in a specific place and has no geographical presence as it has no organizational setup. Conversely, the Secondary market is present physically as a stock exchange, which is situated in a particular geographical area.
- Investment bankers do securities trading in the case of the Primary Market. Conversely, brokers act as intermediaries while trading in the secondary market.
Head To Head Comparisons Between Primary Market vs Secondary Market
Below is the topmost Comparison between Primary Market vs Secondary Market:
| Basis of Comparison |
Primary Market |
Secondary Market |
| Meaning | A marketplace for new shares is the Primary Market | The place where formerly issued securities are traded is the Secondary Market |
| Another name | New Issue Market (NIM) | After Market |
| Type of Purchasing | Direct | Indirect |
| Financing | It helps supply funds to budding enterprises and existing companies for expansion and diversification. | It does not provide funding to enterprises |
| How many times security can be sold? | Only once | Multiple times |
| Buying and Selling | Buying & selling are between the Company and the Investors | Buying & selling is only between Investors |
| Who will gain the amount on the sale of shares? | Company | Investors |
| Intermediary | Underwriters | Brokers |
| Price | Fixed-price | Fluctuates depend on the demand and supply forces |
| Organizational difference | Not rooted in any specific spot or geographical location | It has a physical existence |
Conclusion
The two financial markets play a major role in mobilizing money in a country’s economy. The primary Market encourages direct interaction between the companies and the investor, while on the contrary, the secondary market is where brokers help the investors to buy and sell the stocks among other investors. In the primary market, bulk purchasing of securities does not happen, while the secondary market promotes bulk buying.
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