What Is The Main Difference Between A Primary Market And A Secondary Market?
- 14 Jul 2023
- By: BlinkX Research Team
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In the dynamic world of the stock market, knowing the difference between primary and secondary markets is key to understanding the working of the share market. In the trading of securities, these two domains serve different needs, catering to investors and companies. In this article, let's explore the details of the difference between primary and secondary markets.
A primary market is where new shares are traded, allowing companies to raise capital for expansion and diversification. On the other hand, the secondary market lets investors trade previously issued securities, where prices fluctuate depending on demand and supply. By understanding the difference between primary market and secondary market, you can better understand and navigate the share market.
What is Primary Market?
Primary and secondary markets are fundamentally different. Understanding what primary and secondary markets are is crucial before we jump into the difference between primary market and secondary markets.
So, primary markets are places where companies offer new shares for sale to the general public. They raise money for long-term capital requirements, like expanding businesses or buying new ones. The corporation makes a variety of issues, including public issues, offers for sale, right issues, bonus issues, and IDRs.
A company bringing an IPO is called an issuer, and the process is called a public offering. A lot of merchant bankers (investment banks) and underwriters help sell the shares, debentures, and bonds to investors directly. However, underwriters and investment banks must be registered with SEBI (Securities Exchange Board of India).
Basically, there are two kinds of public issues:
Initial Public Offer (IPO)
When a company goes public for the first time, listing its shares on the stock exchange after making the offer is called the IPO.
Follow On-Public Offer (FPO)
If a company makes a public offering one more time, it's called a follow-on offer.
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Table of Content
- What is Primary Market?
- What Is The Secondary Market?
- What Are The Differences Between The Primary Market And Secondary Market
- Conclusion
What Is The Secondary Market?
On the secondary market, investors sell stock, bonds, debentures, options, commercial papers, treasury bills, etc. of corporations. It can either be an auction market where securities are traded on a stock exchange or an over-the-counter market where securities are traded without using a stock exchange platform.
Initially, in the primary market, the securities are offered to the general public for a subscription fee; the company receives the money and the investors receive the stock; once listed, they are traded on the stock exchange. Additionally, most of the trading of the company happens on these stock exchanges. Bombay Stock Exchange and National Stock Exchange are the top two stock exchanges in India.
With the help of brokers, an investor can buy and sell securities through the stock exchange. A broker is a member of the stock exchange where an investor trades his or her stock. You can find out whether a broker is registered by looking at the certificate of registration they get from SEBI.
With a better understanding of primary and secondary markets, let's explore what are the differences between the primary market and secondary market.
What Are The Differences Between The Primary Market And Secondary Market
In terms of the difference between the primary and secondary markets, the following points should be noted:
Basis | Primary Market | Secondary Market |
Meaning | The primary market refers to the market where new shares are traded. | A secondary market is where formerly issued securities are traded. |
Also known as | New Issue Market | After Market |
Purchasing Type | Direct | Indirect |
Financing | Funds are provided to budding and existing enterprises for expansion and diversification. | It does not provide financing to companies. |
The number of times security can be sold | Only once | Multiple times |
Buying and Selling | Company and investors | Investors |
Who gains the amount from share sales | Company | Investor |
Intermediary | Underwriters | Brokers |
Price | Fixed Price | Fluctuates based on demand and supply |
Organisational difference
| No particular location or spot is rooted in it. | It exists physically. |
Conclusion
Anyone trying to navigate the share market needs to know the difference between primary market and secondary market. Companies use the primary market to raise capital by offering new shares to the public, while investors trade previously issued securities on the secondary market.
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