Difference between primary market and secondary market
Capital markets refer to a platform where the trading of various assets like bonds, equity, and securities takes place. Capital markets are mainly divided into two types- Primary Markets and Secondary Markets.
The primary market refers to a place where securities are created whereas the secondary market refers to a place where these securities are traded. When a company raises capital for the first time, it is known as the primary market. E.g.- companies issue Initial Public Offering (IPO) in the primary market only. Shares issued by the company in the primary market get listed on the secondary market. All the exchanges like BSE, NSE, NASDAQ, NYSE, german DAX, etc. come under the secondary market.
For example- Company ABC Limited hires underwriting firms to determine the financial details of its IPO. The underwriters detail that the issue price of the stock will be Rs. 1,000. Investors can buy the shares of this IPO at this price directly from the issuing company. Since this is the first opportunity that investors have to contribute capital to a company through the purchase of its stock, it is called a primary market.
In another example, if you buy a stock of Reliance Industries Limited (RIL), you are dealing only with another investor who owns shares in RIL. Reliance Industries itself is not involved in the transaction. This is called the secondary market.
In other words, it can be said that while the primary market offers avenues for selling new securities to investors, the secondary market is the market dealing in securities that are already issued by the company.
Here are some of the major differences between Primary and Secondary Markets-
The basic feature of the primary market is that it is associated with new issues. Primary market issues capital through public issue, offering for sale, private placement, and right issue. Accordingly, capital is raised for funding companies and the government. All the transactions are primarily made in the primary market and the secondary market comes at a later stage.
The secondary market is known to provide liquidity to all the traders and any investor or seller who needs money can sell their securities to any number of buyers. Any development in the securities leads to price fluctuation in the market and the market adjusts itself to the price of the new securities. Moreover, the transaction cost in the secondary market is lower due to the high number of transactions as compared to transactions in the primary market.
Investors in the secondary market are bound to follow the rules and regulations as specified by various stock exchanges and the government and these rules and regulations ensure the safety of securities of the investors.
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