Primary vs. Secondary Market Differences
The investors in a primary market can directly purchase the shares from an entity and the prices of the newly launched securities in this market is generally fixed whereas the investors in a secondary market do not have the chance to purchase the shares directly since these are traded amongst investors and the prices of securities in this market tend to fluctuate as a result of 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 source of funding to 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 marketPrimary MarketThe primary market is where debt-based, equity-based or any other asset-based securities are created, underwritten and sold off to investors. It is a part of the capital market where new securities are created and directly purchased by the issuer.read more. A company usually makes an IPO (Initial Public OfferInitial Public OfferInitial Public Offering (IPO) is when the shares of the private companies are listed for the first time in the stock exchange for public trading and investment. This allows a private company to raise the capital for different purposes.read more) 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 the purpose of 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 sharesIssues Further SharesShares Issued refers to the number of shares distributed by a company to its shareholders, who range from the general public and insiders to institutional investors. They are recorded as owner's equity on the Company's balance sheet.read more to the general investing public.
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Source: Difference Between Primary and Secondary Market (wallstreetmojo.com)
What is the Secondary Market?
If the investors then go on to trade these securities among themselves, such a market is known as a secondary market. Various stock exchangesStock ExchangesStock exchange refers to a market that facilitates the buying and selling of listed securities such as public company stocks, exchange-traded funds, debt instruments, options, etc., as per the standard regulations and guidelines—for instance, NYSE and NASDAQ.read more like NASDAQ, NYSE, NSE, etc. list out the prices of these securities on a daily basis so as 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 underwriterUnderwriterThe underwriters take the financial risk of their client in return of a financial fee. Market Makers like financial institution and large banks ensure that there is enough amount of liquidity in the market by ensuring that enough trading volume is there.read more, pricing each share at 45$ and managing to raise a total of $8.1 billion. As of July 3rd, it trades at 44.23$ per share in the secondary market.
Primary Market vs. Secondary Market Infographics
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Source: Difference Between Primary and Secondary Market (wallstreetmojo.com)
Key Differences
- In the primary market, investors have the chance to purchase the shares directly from the company, whereas in the secondary market, they cannot do so as shares are now being traded among investors themselves.
- The prices in the primary market tend to be fixed during the new issue, whereas in the secondary market, they fluctuate depending on the demand and supply for the concerned security.
- The amount received as proceeds from the sale of shares in the primary market are income to the company, but in the case of the secondary market, it becomes income to the investors.
- Usually, the investment banksInvestment BanksInvestment banking is a specialized banking stream that facilitates the business entities, government and other organizations in generating capital through debts and equity, reorganization, mergers and acquisition, etc.read more 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, it is the brokers that act as middlemen or intermediaries between investors.
- In the primary market, the security can be sold only once at the time of 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 sort of physical existence. A secondary market, on the other hand, 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
| Basis | Primary market | Secondary market |
|---|---|---|
| Meaning | It 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. |
| Purpose | Undertaken for expansionary plans or for promoters to offload their stakes | It 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. |
| Intermediary | Underwriters: Companies seek the help of underwriters in issuing these securities to the public | Brokers: Investors trade these shares among each other through brokers |
| Price | It 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 name | New Issue Market (NIM) | Aftermarket |
| Counter-party | Company is directly involved and thus sells the shares, and the investors buy | Investors buy and sell the shares among themselves. There is no direct involvement of the company. |
| Frequency of sale | Security can be sold only once in an IPO. However, through an FPO (Follow on Public Offer)FPO (Follow On Public Offer)Follow on Public Offering (FPO), also known as a seasoned equity offering, is the method to raise capital by offering additional equity or preference shares after raising funds through Initial Public Offer.read more, 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 shares | Company | It happens to be the investors in the case of secondary markets. |
| Location | It 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
The stock market, through its primary and secondary market, serves as an important source of funding for the companies and helps in the mobilization of funds. The primary market thereby helps in doing just the same by helping companies gaining access to such capital.
The Secondary market, through its various exchanges, tends to serve as the barometer of the economy and thus tends to reflect the general health and economic conditions of the country by providing a ready market to gauge the current investor sentiment.
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