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Difference Between Primary and Secondary Market

Updated on May 28, 2024
Article byWallstreetmojo Team
Edited byAaron Crowe
Reviewed byDheeraj Vaidya, CFA, FRM

Primary vs. Secondary Market Differences

The investors in a primary market can directly purchase the shares from an entity. As a result, the prices of the newly launched securities in this market are generally fixed. In contrast, the investors in a secondary market do not have the chance to purchase the shares directly since these are traded amongst investors. As a result, the prices of securities in this market tend to fluctuate due to security’s demand and supply.

The securities are usually issued for the first time in the primary market, which then goes on to be listed on a recognized stock exchange to facilitate trading in the secondary market. The primary market tends to act as a funding source for new companies that want access to capital for expansion. The secondary market does not provide such scope but merely acts as a ready market for the securities.

What is the Primary Market?

When a company issues its shares for the first time to investors, the trade is said to take place in a primary market. A company usually makes an IPO (Initial Public Offer) when it goes on to sell its shares for the first time to the public. It is the market where securities like stocks and bonds are created for the first time for issuance.

The public issue is generally of 2 types.

  • IPO(Initial Public Offering): This is where an unlisted company issues its shares to the public for the very first time.
  • FPO (Follow-on Public Offer): This happens when an already listed public company issues further shares to the general investing public.
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Primary Market vs Secondary Market Video Explanation

 

What is the Secondary Market?

If the investors then trade these securities among themselves, such a market is known as a secondary market. Various stock exchanges like NASDAQ, NYSE, NSE, etc., list the prices of these securities daily to enable the investors to understand the price at which these securities can be bought or sold in the secondary market.

Example – Uber came up with its IPO in May 2019, with Morgan Stanley as the underwriter, pricing each share at 45$ and managing to raise $8.1 billion. As of July 3rd, it trades at 44.23$ per share in the secondary market.

Primary Market vs. Secondary Market Infographics

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Key Differences

  • In the primary market, investors can purchase the shares directly from the company. In contrast, they cannot do so in the secondary market as shares are now being traded among investors themselves.
  • The prices in the primary market tend to be fixed during the new issue. In contrast, the secondary market fluctuates depending on the demand and supply for the concerned security.
  • The amount received as proceeds from the sale of shares in the primary market is income to the company, but in the case of the secondary market, it becomes income to the investors.
  • Usually, the investment banks perform the role of underwriters to the issue and thus serve as middlemen in the issuance process in the primary market. Whereas in the secondary market, the brokers act as middlemen or intermediaries between investors.
  • In the primary market, the security can be sold only once upon issuance. The secondary market has the advantage of having the stock sold off an infinite number of times among the investors.
  • The primary market does not usually have any physical existence. On the other hand, a secondary market is set up as a stock exchange, usually in a particular geographical location.
  • A company that wishes to raise capital has to undergo a lot of regulation and due diligence when it wants to sell its shares in the primary market. The secondary market does not warrant any sort of such requirement.

Comparative Table

BasisPrimary marketSecondary market
MeaningIt is the market where securities are issued for the first time.It is the market where shares already issued earlier are then traded between investors.
PurposeUndertaken for expansionary plans or for promoters to offload their stakesIt does not provide any funding to the corporates, rather helps to gauge investor sentiment as reflected in the stock prices. It provides a ready market for trading securities between investors.
IntermediaryUnderwriters: Companies seek the help of underwriters in issuing these securities to the publicBrokers: Investors trade these shares among each other through brokers
PriceIt is fixed by the investment banks at the time of issue, after sufficient discussion with the management.The price depends on demand and supply forces or the security in the market.
Alternate nameNew Issue Market (NIM)Aftermarket
Counter-partyCompany is directly involved and thus sells the shares, and the investors buyInvestors buy and sell the shares among themselves. There is no direct involvement of the company.
Frequency of saleSecurity can be sold only once in an IPO. However, through an FPO (Follow on Public Offer), a company may raise further money by issuing further shares, and an FPO is also considered a part of the primary market, though the security even then can be sold only once by the company in FPO.The same security can interchangeably be sold between investors.
Recipient on a gain on sale of sharesCompanyIt happens to be the investors in the case of secondary markets.
LocationIt is usually not placed in any specific geographical location. It does not have any physical existence.It has physical existence, usually through stock exchanges.

Conclusion 

Through its primary and secondary markets, the stock market serves as an important source of funding for companies and helps mobilize funds. The primary market thereby helps do just the same by helping companies gain access to such capital.

Through its various exchanges, the Secondary market tends to serve as the barometer of the economy. Thus, it tends to reflect the country’s general health and economic conditions by providing a ready market to gauge the current investor sentiment.

Recommended Articles

This article is a guide to the Primary Market vs. Secondary Market. Here we discuss the top 9 differences between them, infographics, and a comparison table. You may also have a look at the following articles –

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