What are Primary and Secondary Markets: There are an array of financial markets, but fundamentally the term gets categorised into two parts; primary and secondary. The former is a stage or platform or the market where securities get created. Investors then trade them among themselves in the market, which is the secondary market.
Without knowing the utility and significance of both the markets, there is no way forward in investment in financial markets. Individuals would find it exemplarily tough to navigate through the waters of stocks, commodities, forex and other securities and commerce and finance related instruments.
What is The Primary Market?
It is a type of market that helps companies, conglomerates (private and government both) to raise capitals from the market by issuing initial public offering (IPO). It opens the gates for investors to seek shares or stocks directly from the first source. So, that is the first-hand interaction between issuer and receiver. Here, the chances of profit bookings blossom.
The direct purchase of shares and securities by investors help companies to receive funds for expanding their businesses and fund some projects. Hence, the entire capital that a company exhibits on its balance sheet also includes the money raised through the primary market.
The primary market also opens the doors for people to exercise activity of buying shares straight from underwriting firms which determine the issue price of a stock. In a sense, it is the first chance for investors to contribute directly to a company in its development.
Be that as it may, marketing and campaigning never go out of style and fashion. The IPO issuer company and investment bank come together to create awareness among the targeted traders for convincing them about the probable advantages. There is a belief that since the market is marred with the concept of volatility, countering it through strategies is essential. That’s the reason; companies begin at a low price.
Besides this, despite being in the list of the secondary market, a company can still raise funds. It can happen if the issuer decides to offer the right shares to investors at a lower price than the current price. It can work as a reward for the loyal shareholders, who support the company in their thick and thin.
The distribution happens through prorated rights, depending upon the number of shares owned by an individual investor. At the same time, others can start afresh as a new investor.
The primary market has other distinguishing parts; Preferential allotment and Private placement.
Preferential Allotment: In this, investors get selected and offered shares at a price which are not available to the general traders.
Private Placement: It promotes companies to provide their shares to weighty market players, including banks, hedge funds and others. Besides, these shares are unavailable publically.
Likewise, governments, industrialists and businesses house can also take the route to generate debt capital by offering bonds. That’s also a part of the primary market. They can choose to issue long-term or short term bonds. Use of coupon rates takes place, which is similar to the interest rate used during the issuance time. However, it may ferry either way; higher and lower compared to the pre-existing bonds.
The moot point is, the issuer of securities is the prime source, hence known as the primary market.
What is The Secondary Market?
When a company issues some shares for raising capitals or funds, they get listed in a secondary market. Precisely, all stock exchange markets like the NYSE, Nikkei, Nasdaq, London Stock Exchange, Australian Stock Exchange, and many others. The secondary markets are like the front doors for retail investors to invest and make better returns in every possible way. Here, investors trade, transact and bid among themselves without the interference of issuer companies.
For example: If a trader is looking to buy shares of an Apple, he/she does not have to ask the company. They can put the bid and draw it through the process from another investor or a shareholder. Here, Apple nowhere involves directly impacting the deal.
The secondary market works wonder in the debt markets. Every bond has a date of maturity, which usually amounts to several years down the lane. If the bondholder requires some quick cash or sees the interest rates plummeting, then he/she can take a route of the secondary market and sell them at a hefty price for some profit. It hits two targets with one stone. The buyer is at benefit too as it saves capital for coupon rate.
The secondary market has bifurcation: Dealer Market and Auction Market.
Here, all market dealers, traders, investors, buyers and sellers congregate through digital ways via electronic network groups. In this, dealers have the right over the security’s inventory. They allow sellers and buyers to do their transactions. They make profits through the process of spreads between the prices traders sell and buy securities. Dealers are market makers as well for they compete within their community to provide the best offer to buy and sell for investors. The underlying statement is that contest between dealers benefits traders.
Here, various organisations, institutions and individuals who are passionate about share markets assemble at a location to pick, buy and sell stocks. Institutions announce the prices of securities and people who are willing to trade, take them at that rate. The process is known as the ask and bid prices. The primary thought behind it is to provide a platform and create a market that allows an array of parties hailing from distinct backgrounds to trade and display their prices transparently.
Wise Words – Primary and Secondary Markets
Both primary and secondary markets are like day and night. They may not co-exist mutually, complement each other. One cannot go without another. These markets are exclusive in every sense attracting buyers and sellers out of their fundamental features and rational behaviours that empower investors and help them draw profits.