Introduction
Before understanding the difference between the primary market and the secondary market, we have to know the meaning of the market in terms of the capital market. The term market has been defined in various ways as per the attached purpose. In simple terms, we can say that the market is known as a meeting place of buyers and sellers. Here in this article, we will discuss the capital market. The capital market can be categorised into two parts: the first is the primary market, and the second is the secondary market. Let’s learn about the capital market in detail.
Meaning of capital market
The capital market is the one kind of place that enables the trading of assets, like bonds, equity, securities, etc., all types of this financial instrument were traded. The capital market can be defined in two parts, namely primary and secondary markets know about in detail that both need.
What is the primary market?
In simple words, we can say that the primary market means a place where the securities are created for the first time and sell it to the public. In that market, the people who want to invest their money can buy these securities.
We can say that the primary market is a source of securities. Here, the companies and the government can gain capital via the primary market. At that place, companies can get long-term capital as a fund for organising various operating business functions. These funds can be raised by issuing debentures, publishing an IPO (initial public offering), bonds, etc.
Features of primary market
The primary market has the following features;
It deals with fresh securities;
A significant feature of that market is that any new issues are produced and introduced there for the first time. All kinds of securities like shares, debentures, bonds, etc., are introduced first for sale. That’s why it is also known as the New Issue Market (NIM).
Floating of capital source
The primary market first introduces the public issue of IPO, debentures, bonds, etc.; through the primary market, companies and the government can quickly raise their long-term capital from this place.
It comes before the Secondary Market
As we mentioned above, all the securities will first be introduced for deals in this market and then come on the secondary market.
What are the benefits of the primary market?
Both primary and secondary markets have particular benefits for investment purposes; there are also some similarities. The primary market has some unique benefits, which are given below;
- Through this market, companies can raise capital at the lowest cost.
- It helps to minimise the risk of diversification.
- The manipulation of the price of securities is much lower.
- This market is quite liquid; that’s why the securities can be sold quickly.
- Through this market, foreign investors can invest directly.
- It provides more stability and reduces fluctuation.
Types of primary market issues
Public issue
Companies and governments that want to enter the primary market use this method. Public issue is the standard method for securities issues in the primary market. The proposed company issues securities to the public for sale through this method. A person who invests in these securities becomes a company’s shareholder. It is also called a public issue. There are two other ways to initiate this method, which are given below.
Initial public offering
Here, the new and fresh issue of securities is offered by the newly entered company in the market. The company initial offer to the public for selling to share or any other securities which are want to produce. Then, after the completion of the public offer process, the company’s securities can be listed, and they are traded in the secondary market via the stock exchange.
Further Public Offer or Follow on Offer/ FPO
Here in this method, a company already listed in the stock market introduces new share issues to the public. When the listed company wants to collect additional funds can use.
Private placement of share
Through this method, securities like bonds, stocks, or any financial instruments are offered to small groups of people, investors or institutions, or both, by the company. The sale is made among the selected investors and institutions, rather than in the open market. It’s an alternative to the method of an initial public offering (IPO) for the company seeking to raise funds.
Preferential issue of share
The preferential issue is a kind of issue of shares or convertible securities issued by a listed company to a selected group of persons according to the Companies Act. However, it is not a rights issue or a public issue. By using this method, the company can raise capital in an easy and fast way to enlarge its business. Here in the allotment of preferential issue of a share, that shareholder receives the first dividend before the company’s ordinary shareholders.
Qualified institutional placement
It is another type of private placement here. Through this method, the company already listed in the primary market issues its shares, debentures, or warrants, in part or fully convertible. The qualified institutional buyer purchases these securities, which are convertible depending on their nature. Qualified institutional investors have financial knowledge and expertise in entering and investing in the capital market, and they are registered with SEBI.
Right issue of share
It is another kind of method to issue shares in the primary market. In this method, the listed company will issue shares to its existing shareholders by offering a discount or fixed price for a limited period.
Bonus issue of share
In this method of issue, the company gifts the shares to its existing shareholders. Here is one thing we should note: by issuing bonus shares, there is no required capital for that. The company will issue fully paid shares from its reserves fund or securities premium account.
What is the secondary market?
In simple words, we can say that the secondary market means a place where investors and buyers trade in securities that are already created in the primary market. It is done after the completion of an IPO and involves shares that were ultimately sold in the primary market.
Here in this market, the investors and buyers trade in the securities that they already own. The secondary market is also known as a stock market. However, we should understand that the securities are also sold on the primary market at the first time when it was an issue at first.
What type of role does the secondary market play?
The secondary market plays a significant role in creating liquidity and ensuring traders. This market is always ready for any purpose of securities, like selling, buying or trading, etc. All these securities can be traded freely among the initial and new investors without any interference from the issuing company in this market.
What is an example of a secondary market?
A secondary market is a place where investors and buyers come together for buying and selling purposes of securities and financial instruments. For example, we can say the National Stock Exchange (NSE), Bombay Stock Exchange (BSE), the NASDAQ, the Singapore Stock Exchange, etc.
Types of secondary market
The secondary market can be categorised into two parts; the first one is the stock exchange, and the second one is the over-the-counter market. The stock exchanges are the platforms where sellers and buyers can perform their securities trades—for example, NASDAQ, BSE, etc. These are the best examples of that market.
Features of secondary market
The main features of the secondary market can be described as below:
It creates liquidities
The most significant feature of the secondary market is that there is scope for immediate liquidity. The conversion of stock or securities speedily converts into cash through liquidity.
A secondary market arises after a primary market
As discussed above, new securities are first created or introduced in the primary market. Even new securities made there are also sold there; then, after that, come secondary markets for trade.
The secondary market has a prescribed place
There is a prescribed place where the securities are traded, for example, NASDAQ and BSE. However, there is no rule for buying or selling securities only via the secondary market. Any individual party can manually buy or sell their stakes, and that transaction will also be known as a transaction of the secondary market. But after all, it’s also a fact that the transactions of buying or selling are made and completed via the stock exchange.
It enlarges opportunities for new investment in a market
We often see the price movements of securities or shares fluctuate in the market. That’s the reason for the benefits of that situation; it attracts many new investors to enter the market. As a result of this, it increases overall investment.
Difference between primary market and secondary market
When we think of a primary market and a secondary market, it seems that both have the same meaning. That causes some confusion in our minds about whether there is some difference or not. But in fact, there is some difference between the primary market and the secondary market, which are given below;
Relation to the trade of securities:
All kinds of securities are first introduced or created and sold in the primary market, while they come in the secondary market after being issued in the primary market.
Nature of transaction of securities:
The investors directly buy securities from the issuers when they issue an IPO in the primary market. While after compilation of the IPO process, the securities are allowed to trade in the secondary market.
Verbiage:
The primary market is also known as a New Issue Market(NIM); While the secondary market is known as defaults after the market.
The factor of Price Fluctuation:
In the primary market, the price fluctuation ratio is lower compared to the secondary market.
Relation of Share Path:
The Shares or securities cannot be traded on the secondary market without being introduced in the primary market.
Read More:
Types of Capital Market: A Complete Guide for Beginners
What Are the Functions of Commercial Banks in India? 10 Key Functions Explained
