In order to make it easier to buy and sell securities, the primary market and secondary market are two crucial elements of the financial ecosystem.
Although they both involve trading in financial instruments, they run differently. The primary market is where new securities are first issued, enabling businesses to raise money by offering shares or bonds to investors directly. In contrast, these already-issued securities are traded on the secondary market between investors without the involvement of the issuing company.
Let’s understand the differences between both types of markets in a little more detail:
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|
|Meaning||A 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 Securities||It deals with new securities, i.e. securities that were not previously available, and are offered for the first time to the investors||It is a market for old securities which have been issued already.|
|Sale/ Purchase||Securities are acquired from issuing Companies themselves.||Securities are purchased and sold by the investors without any involvement of the companies.|
|Nature of Financing||It 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.|
|Liquidity||It 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 difference||It 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.|
It’s important to note that both markets are essential for the functioning of the financial system. The primary market allows companies and governments to raise funds for growth and development, while the secondary market enhances liquidity, price discovery, and efficient allocation of capital by enabling investors to buy and sell securities after their initial issuance.
In summary, the primary market deals with the issuance of new securities from issuers to investors, while the secondary market focuses on trading existing securities among investors. Together, these two markets play a crucial role in facilitating capital formation and providing liquidity in the financial system.