In general, The term market can have many distinct meanings, although it is most commonly used to refer to both primary market and secondary market. In reality, the phrases primary market and secondary market are interchangeable; the primary market is where securities are generated, while the secondary market is where they are traded among investors.
The primary market is a part of the capital market where firms, governments, and other organizations buy and sell debt and equity-based instruments to raise money.
The primary market is where a company decides to go public for the first time by funding an Initial Public Offering (IPO). A primary market is also known as the New Issue Market because securities are sold for the first time here (NIM).
During an IPO, the company offers its stock to primary market investors directly. Underwriting refers to the full process of generating investment cash by selling new stock to investors through an initial public offering (IPO).
Participants of the primary market:
- Merchant bankers
- Bankers at an issue
- Registrar to an issue
- Underwriters to the issue
- Debenture trustees
- Investment banks
- Portfolio managers
Procedure to sell securities:
- Direct sale
- Through broker
- Through under writer
- Through intermediary financial interest
Advantages and Disadvantages of Primary market:
- When compared with the secondary market there is less chance of price manipulation that instantly leads to transparency.
- Diversification of offers
- Cost-effective to raise capital and also securities that are offered in the primary market can be instantly sold in the secondary market.
- Because of unlisted companies are out of preview of SEBI regulations only limited information is available to investors.
- No historical trading data will be available as shares are issued for the firsttime that makes investor investment difficult.
The secondary market is where securities are traded between investors and traders. This is done After the Initial Public Offering (IPO) has ended and the shares are sold in the primary market.
Functions of the secondary market:
- To contribute to economic growth through allocation of funds.
- To facilitate liquidity and marketability of the outstanding equity and debt instruments.
- A measure of safety and fair dealing to protect investors interests.
- Market price of the stock exchange reflects the performance.
- This market price is readily available to investors.
- Valuation of securities caused by the changes in the internal environment.
Difference between Primary market and Secondary market
Following are the difference between Primary market and Secondary market:
|Primary market||Secondary market|
|A primary market is a market where new securities are issued in the market for the first time, either by an existing company or a new company||A secondary market is a market where already issued, existing securities are traded on stock exchanges.|
|Authority of regulation|
|Governed by SEBI and Companies Act.||Governed by laws of stock exchanges and SEBI.|
|Type of purchase|
|Direct purchase||Indirect purchase|
|Determination of price|
|The price of securities is determined by the company itself when issued for the first time.||Here the security prices are determined by demand and supply forces in the stock exchange|
|Fluctuation in price|
|Security prices are fixed||Because of demand and supply, security prices are fluctuating|
|It is not rooted in any particular spot and has no geographical location.||A stock exchange is fixed at a specific place. In India, there are 23 stock exchanges of BSE and NSE located in Bombay. ICSE, OTECI are 2 more|
|Intermediaries of the primary market are Underwriters Merchant bankers Portfolio managers||Here intermediaries are Brokers Sub brokers|
|Type of company|
|Whether the companies are listed or unlisted can issue new shares.||Here, only the listed companies can issue shares.|
|The volume of transactions is low||The volume of transactions is high|
As a result of the preceding discussion, the difference between the primary market and secondary market. It is important to note that both primary and secondary markets help in earning profits and providing funds to the companies and investors.
Further related readings:
- Difference between Centralization and Decentralization
- Difference between Balance of trade and Balance of payment