Financial Management | Corporate Accounting

Primary Market and Secondary Market

Primary and secondary markets are the forms of markets where financial instruments and created and traded respectively.

What is a Primary Market?

The primary market is involved with issuing original instruments such as shares, debentures, and other similar instruments.

Companies sell shares in the primary market because they need money to fund their operations and buy their stock. They use the money they earn from operations to buy the shares. The shares of their company are owned by all the shareholders, or “creditors”. If the company does not pay the shareholders their share of the profits from operations, these creditors may sue the company to recover their share.

What is a Secondary Market?

On the other hand, the secondary market is concerned with selling and exchanging these instruments from one holder to another. These financial instruments are also referred to as ‘Securities.’

Individuals buy shares in the secondary market as they need the money to finance their own personal needs and wants. For example, an individual might want a new home but can only afford to pay half the house price. That individual can get a mortgage for the other half of the price.

Hence, sometimes these markets are collectively known as Security markets or security exchanges. Every country has its own security market.

The most common differences between a primary and a secondary market have been elaborated in the below-given table:

Basis Primary Market Secondary Market
MeaningA primary market refers to the up which helps the industry to raise funds by issuing different types of securities.The secondary market is a market for subsequent sale/purchase and trading in securities.
Nature of SecuritiesIt deals with new securities, i.e. securities that were not previously  available, and are offered  for the first time to the investorsIt is a market for old securities which have been issued already.
Sale/ PurchaseSecurities are acquired from issuing Companies themselves.Securities are purchased and sold by the investors without any involvement of the companies.
Nature of FinancingIt provides funds to new enterprises & also for the expansion and diversification of the existing one.It does not supply additional funds to the company since the company is not involved in transactions.
LiquidityIt does not lend any liquidity to the securities.The secondary market provides facilities for the continuous purchase and sale of securities, thus lending liquidity and marketability to the securities.
Organizational differenceIt is not rooted in any particular spot and has no geographical existence. It has neither any tangible form nor any administrative, organisational setup.The secondary market has a physical existence in the form of a stock exchange and is located in a particular geographical area having an administrative organisation set up.

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