The Primary and Secondary Markets Explained 

When we hear or see the word “market” we often think about the stock market. That’s partially correct, but the word market may refer to different kinds of markets, namely the primary and the secondary market. 

The Primary Market 

In a nutshell, the primary market is where securities are created. This is where firms sell new stocks and bonds to the public for the first time. 

An Initial Public Offering (IPO), where a private company issues stocks to public investors for the first time, is an example of a primary market. 

This is the first chance of investors to contribute capital to a company through the purchase of its stock. The company’s equity capital consists of the fund generated by the sale of stock in the primary market

A rights offering lets companies raise more equity through the primary market after already having securities enter the secondary market. Present investors are offered prorated rights depending on the shares that they currently own and the others can invest in newly floated shares. 

The Secondary Market 

For purchasing stocks, the secondary market is usually referred to as the stock market. This includes the New York Stock Exchange and the NASDAQ, along with all the other exchanges in the world. In the secondary market, investors trade among themselves. Investors trade previously offered securities without the involvement of the company. 

Meanwhile, in the debt markets, even if the bond is guaranteed to pay its owner the full par value at maturity, the date is usually many years down the road. So instead of waiting for that, bondholders can simply sell the bonds in the secondary market for a profit if interest rates have decreased since the issuance of the bond, making it more appealing to other investors because of its relatively higher coupon rate. 

You can further categorize the secondary market into two types: 

1. The Auction Market 

In the auction market, all individuals and institutions that want to trade securities group together in one area and announce the prices where they are willing to buy and sell. These are called as bid and ask prices. 

The idea is that an efficient market should prevail by bringing together all the parties and having them declare their prices in public. 

In theory, therefore, the best price of a good needn’t be sought out since the grouping  of buyers and sellers will pave the way for mutually agreeable prices.

2. Dealer Market 

The dealer market doesn’t need the participants to congregate in a central venue. Instead, the people are joined through electronic networks. The dealers hold an inventory of a security, then stand ready to buy or sell with market participants. 

These dealers earn their keep through the spreads found between the prices at which they are buying or selling the security. 

An example of a dealer market is the NASDAQ, wherein the dealers, who are known as market makers, provide firm bid and ask prices at which they are willing to buy and sell a security. In theory, the resulting competition between the dealers will result to the best possible price for investors. 

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James Harrison: James, a supply chain expert, shares industry trends, logistics solutions, and best practices in his insightful blog.