What is a Primary Market?
Primary market is a segment of the capital market where entities such as governments, companies and other entities obtain funds through sale of debts and equity-based securities. Since the securities are sold for the first time, a primary market is also referred to as the New Issue Market (NIM). When a company or government needs to raise funds for its operations, expansion plans or policies, they can issue securities to the market, most often in the form of shares or bonds.
In this market, there are three entities involved. It would include a company, investors, and an underwriter. A company issues security in a primary market as an initial public offering (IPO), and the sale price of such new issue is determined by a concerned underwriter, which may or may not be a financial institution. An underwriter also facilitates and monitors the new issue offering. Investors purchase the newly issued securities in the primary market. Once the shares are sold, they are bought and sold by traders in the secondary market.
Generally, in this market, small or individual investors typically have restricted access to IPOs as new shares are first offered to large institutions. However, one of the approaches that provide individual investors with exposure to IPOs is investing in a collective investment scheme (usually mutual fund or investment trust) that takes part in the offering.
Advantages of Primary Market
- A cost effective way to raise capital
- There is less chance of price manipulation
- Primary markets serve as a potential avenue for diversification for investors, thus bringing down the quantum of risk.
- There is transparency in operations.
Disadvantages of Primary Market
- Quite often there might be limited information available to investors before they invest in an IPO.
- There is no benefit of historical data available to analyze the IPO.
- Price volatility is often higher in primary markets as it is difficult to predict the future demands.
What is a Secondary Market?
The secondary market is where investors buy and sell securities they already own. It means that investors can freely buy and sell shares without the intervention of the issuing company. It is what most people typically think of as the ‘’stock market’’. The stock trade is carried out between a buyer and a seller, which the stock exchange facilitating the transaction. These trades facilitated by stock exchange for equity and fixed securities are usually traded over the counter.
Many investors believe in the predictive powers of secondary markets as an indicator for the economic cycle-rise or decline in stock prices indicates a boom or recession. Secondary markets can also help drive share prices towards their intrinsic value through supply and demand, promoting economic and market efficiency.
Most of the secondary markets are fairly liquid in normal market conditions so investors could buy and sell securities at almost any point, making them attractive for individual investors. Examples of popular secondary markets are National Stock Exchange (NSE), the New York Stock Exchange (NYSE), the NASDAQ and the London Stock Exchange (LSE).
Advantages of a Secondary Market
The secondary market is important for several reasons:
- The secondary market helps measure the economic condition of a country. The rise or fall in share prices indicates a boom or recession cycle in an economy.
- The secondary market provides a good mechanism for a fair valuation of a company.
- The secondary market helps drive the price of securities towards their genuine, fair market value through the basic economic forces of supply and demand.
- The secondary market promotes economic efficiency. Each sale of a security involves a seller who values the security less than the price and a buyer who values the security more than the price.
- The secondary market allows for high liquidity – stocks can be easily bought and sold for cash.
Difference Between Primary And Secondary Markets In Tabular Form
|BASIS OF COMPARISON||PRIMARY MARKETS||SECONDARY MARKETS|
|Description||It is the market where securities are issued for the first time.||It is the market where shares already issued earlier are then traded between investors.|
|Prices||The prices in the primary market tend to be fixed during the new issue.||In the secondary market, prices fluctuate depending on the demand and supply for the concerned security.|
|Alternative Name||The primary market is also known as a new issue market.||The secondary market is known as after issue market.|
|Investors||In the primary market, investors have an option to purchase the shares directly from the company.||In the secondary market, the investors buy and sell the securities among themselves.|
|Amount Receive||The amount that is received from the securities becomes capital for a company.||In the secondary market, the amount received reflects as the income of investors.|
|Parties Involved||Company and the investors are involved in buying and selling the security.||In the secondary market investors buy and sell the securities among themselves.|
|Decision Framework||Investors primarily rely on prospectus and word-of-mouth publicity to pick an investment in the primary market.||Several tools are available to the investors to help them pick good investments, such as price to earnings (P/E), price to book (P/B), price to sales (P/S) and more.|
|Regulation||The company issuing securities goes through a lot of regulations and due diligence.||In the secondary market, investors and brokers need to follow the rules set by the exchange and the governing agency.|
|Purpose||The primary market provides finance to the companies who want expansion and growth.||Does not provide funding to companies; rather help investors to make money.|
|Frequency of Buying||The frequency of buying and selling is limited, i.e., the investors can invest once in the market.||The frequency of buying and selling is quite high, i.e., the investors can trade as many times as they wish to.|
|Disadvantage||The major disadvantage of the primary market is that it is very time-consuming and costly.||The major disadvantage of the secondary market is that the investors can incur huge losses due to price fluctuation.|
|Purchase||All the purchases in this market happen directly.||The issuer (company raising capital) is not involved in the trading.|
|Intermediaries||Underwriters are the intermediaries in the primary market.||In the secondary market, the intermediaries are the brokers.|
|Sell of Securities||In the primary market, the security can be sold only once at the time of issuance.||The secondary market has the advantage of having the stock sold off an infinite number of times among the investors.|
|Physical Location||The primary market does not usually have any sort of physical existence.||A secondary market is set up as a stock exchange, usually in a particular geographical location.|
|Products||Products are limited, and mainly include IPO and FPO (Follow-on Public Offer).||Many products are available such as shares, warrants, derivatives etc.|
|Organization||The primary market is not organized.||The secondary market has an organized setup.|
What You Need To Know About Primary And Secondary Markets
- Primary market is the market where securities are issued for the first time whereas secondary market is where shares already issued earlier are then traded between investors.
- The primary market is also known as a new issue market and the secondary market is known as after issue market. Depending upon the demand and supply of the securities traded the prices in the secondary market vary. But the prices in the primary market are fixed.
- The securities in the primary market can only be sold once, while in the secondary market sale and purchase is an ever-going process.
- In the primary market, investors have an option to purchase the shares directly from the company, whereas in the secondary market, the investors buy and sell the securities among themselves.
- The amount that is received from the securities becomes capital for a company whereas; in the case of the secondary market, the same reflects as the income of investors.
- In the primary market, the security can be sold only once at the time of 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 sort of physical existence. A secondary market, on the other hand, is set up as a stock exchange, usually in a particular geographical location.
- The prices in the primary market tend to be fixed during the new issue, whereas in the secondary market, they fluctuate depending on the demand and supply for the concerned security.
- Investors primarily rely on prospectus and word-of-mouth publicity to pick an investment in the primary market. Several tools are available to the investors to help them pick good investments, such as price to earnings (P/E), price to book (P/B), price to sales (P/S) and more.