Difference between Primary Market and Secondary Market
The term 'market' has several meanings attached to it. In layman's terms, the market is defined as the cumulative of buyers and sellers in a particular area. There are two categories of the market, including the secondary market and the primary market. Both are distinctive terms, and they have several differences among them. The cost and price of the particular product pushes the demand, and supply of the product. The market can be either a virtual or a physical entity. There are sellers and buyers in the market and the businessmen in the market are generally in competition with the other companies. There are four significant kinds of markets. They are:
- Perfect Competition
- Monopolistic Competition
So, these are the four kinds of markets. Now, let us discuss the two significant categories of markets.
A primary market is defined as the process wherein the market becomes a source of securities. In the market, securities are created for the people who are investing to buy. These securities are issued in the stock exchange markets so that the companies, as well as the government are able to provide capital. The major function of the primary markets is to enable the company to provide long-term funds. These funds are made by the issue of debentures. An IPO (Initial Public Offering) is a common example of a primary market. An IPO is defined as the process wherein the company issues stocks in the name of the public. An individual needs to have prior knowledge of these markets before investing. The main objective of the primary market is to sell the new shares issued.
The secondary market is defined as the place wherein the issued shares of the company are traded among the investors. In layman's terms, the investors can easily buy or sell the shares without the interference of the company. The secondary market can be categorized into four segments, i.e., auction market, direct search markets, dealer market, and broker market. The significant examples of the secondary market include NYSE (New York Stock Exchange), NSE (National Stock Exchange), etc. One of the major disadvantages of the secondary market is that the price fluctuates very often. This can sometimes lead to an immediate loss of money. There are several other features associated with secondary markets that we will discuss later. Now, let us discuss the fundamental contrasting points between these markets.
||A primary market is defined as the market in which securities are created for first-time investors.
||On the other hand, the secondary market is defined as a place where the issued shares are traded among investors.
||The company issues the shares, and the government interferes in the process.
||There is no interference of the government or the company.
||The primary market is called as a new issue market.
||The secondary market is an aftermarket.
||The buying and selling of shares takes place among the investors and the companies.
||The trading take place only among the investors.
||The primary market provides finance to the companies who want expansion and growth.
||The secondary market does not provide financing to the companies.
||Underwriters are involved in the intermediary process.
||Brokers are involved in the intermediary process.
||The prices in the primary market do not fluctuate, i.e., they are fixed.
||On the other hand, the prices fluctuate a lot in the secondary market because of the demand and supply.
||The products in a primary market are limited, i.e., they include IPO and FPO.
||Shares, debentures, warrants, derivatives, etc., are the kind of products offered in the secondary market.
||The purchase process happens directly in the primary market.
||The company issuing the shares do not involve in the purchasing process.
||The frequency of buying and selling is limited, i.e., the investors can invest once in the market.
||On the other hand, the frequency of buying and selling is quite high, i.e., the investors can trade as many times as they wish to.
||The beneficiary in the primary market is the company.
||The beneficiary in the secondary market is the investor.
||The primary market is not organized.
||The secondary market has an organized setup.
||The companies issuing shares and debentures have to follow all regulations.
||The investors in the secondary market follow the rules provided by the stock exchanges and the government.
||The major disadvantage of the primary market is that it is very time-consuming and costly.
||The major disadvantage of the secondary market is that the investors can incur huge losses due to price fluctuation.
So, these are some of the significant contrasting points between the primary market and the secondary market. It is essential to note that both primary and secondary markets help in earning profits and providing funds to the companies and investors. Now, let us look at some of the key features of these markets.
Features of Primary Market
- New Issues: The fundamental feature of the primary market is that it is associated with new issues. That is why the primary market is called as the (NIM) new issue market.
- Place: Primary market is not a particular place but an activity of issuing, buying, and selling.
- Floating Capital: Primary market issues capital through public issue, offering for sale, private placement, and right issue. This is how the capital is raised for funding the companies and the government.
- It comes before the Secondary Market: All the transactions are primarily made in the primary market. Secondary market comes much later.
Features of Secondary Market
- Liquidity: The secondary market provides liquidity to all the traders. Any investors/ sellers who are in need of money can sell their securities to any number of buyers.
- Adjustable Price: Any development in the securities leads to price fluctuation in the market. The market adjusts itself to the price of the new securities.
- Transaction Cost: The transaction cost in the secondary market is very low due to the high amount of transactions.
- Rules: The investors in the secondary market have to follow all the rules given by the stock exchange and the government. Higher rules and regulations ensure the safety of securities of the investors.
So, these are some of the features of the primary and secondary market. It is interesting to note that both primary and secondary markets are used for buying and selling of shares and debentures. Both these markets fund the companies, investors, and the government. However, with the profit yielding, associated risks also come along. Therefore, it is advised to invest after having knowledge about the advantages and disadvantages of the market. Thus, primary and secondary markets are essential for profit earning and funding of companies.