Know the basic Difference Between Primary Market and Secondary Market

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 meanings as per the attached purpose. In simple terms, we can say that the market is known as a conclusive place of buyers and sellers. Here in this article, we will discuss the capital market. The capital market can be categorized into two parts: the first is the primary market, and the second is the secondary market. Let’s know 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 organizing 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 the 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., will introduce firstly for buy. That’s how it is also known as (NIM) means New Issue Market.

Floating of capital source

The primary market firstly introduces the public issue of IPO, debentures, bonds, etc.; through the primary market, the companies and 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 the investment purpose; there are also some similarities. The primary market has some unique benefits, which are given below;

  • Through this market, the companies can raise capital at the lowest cost.
  • It helps to minimize the risk of diversity.
  • 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 directly lead for investment.
  • It makes more stability and reduces fluctuation.

Types of primary market issues

Public issue 

The companies and governments who want to enter the primary market are using this method. Public issue is the standard method to 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 has become 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 offer

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 compilation of the public offer process, the company’s securities can be listed, and it’s 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 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 other than in the open market. It’s an alternative way of the method initial public offer(IPC) 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 the selected group of a person 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 their 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 share, debentures, or warrants in part or full convertible. The qualified institutional buyer purchases these securities, which are convertible depending on 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 among its existing shareholders by offering a discount or fixed price for a limited period.

Bonus issue of share

In this method of issues, the company gifts the shares to its existing shareholders. Here is one thing we should note: by issues of bonus share, 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 the investor and buyer trade in securities that are already created in the primary market. It is done after the completion of IPO. and shares which are ultimately sold in the primary market.

Here in this market, the investors and buyers trade in the securities which already their 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 play does the secondary market?

The secondary market plays a significant role in creating liquidity and ensuring the traders. This market is always kept 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 the example of a secondary market?

A secondary market is a place where investors and buys 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 categorized into two parts; the first one is the stock exchange, and the second one is over the counter market. The stock exchanges are the platform where the seller and buyers can perform their securities trade—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 creating liquidity. The conversion of stock or securities speedily converts into cash through the liquidities.

A secondary market arrive after a primary market

As discussed above, new security is first created or introduced in the primary market. Even new security made there is also sold there then after that comes secondary markets for trade.

The secondary market has a prescribed place

There is a prescribed place where the securities are traded, for example, NASDAQ 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 opportunity for new investment in a market

We often see the price movements of securities or shares are fluctuate in the market. That’s the reason to get the benefits of that situation, it attracts many new investors to enter the market. As a result of this, that increase allover investment.

Difference between primary market and secondary market

We think of a primary market and a secondary market it seems that both are the same meaning. That makes some confusion in our mind, whether there is some difference or not. But in fact, there is some difference between primary market and secondary market that 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 after the issuing 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 low is 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.  

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