We hear a lot about two common words related to the stock market, Primary Market and Secondary Market. There are some distinct differences between Primary Market and Secondary Market. In this article, we are going to discuss in detail about these two kinds of markets i.e. Primary Market vs Secondary Market.
Difference Between Primary Market and Secondary Market
- Difference Between Primary Market and Secondary Market
- What is Primary Market?
- Primary offering types
- What is Secondary Market?
- How do the Primary market and Secondary markets function?
- Difference between Primary and Secondary Market
- Primary vs secondary market – Wrapping up
By the word market, we understand that it is a place where buyers and sellers trade goods in exchange for money. This word covers all kinds of markets. But in stock market terms, the word market stands for capital market as a whole. Within this capital market, there are two broad types of markets. the Primary and Secondary Markets. While there are lots of differences between Primary and Secondary markets, there are similarities too. Let’s explore in detail.
What is Primary Market?
The Primary Market is the market where the securities are created. An initial public offering (IPO) is an example of a primary market. In Primary Market, companies float shares and bonds for the first time and investors invest in these securities for the first time.
This is the reason why it is called the primary market. In the primary market, investors have an opportunity to invest in shares from the banks who act as underwriters for the issue.
Through the primary market, investors can invest directly in a company that issues shares and raises funds for their desired goals. The equity capital of a company consists of shares issued through IPO and other means in the Primary market.
Suppose a company issues 100,000 shares through IPO priced at INR100 per share. Following the IPO, the equity capital of the company increases by INR1 crore which was raised through the primary market offer.
In the Primary market, investors buy shares directly from the issuer. This is the basic difference between Primary vs Secondary market. People trade shares in Secondary market.
Primary offering types
Besides IPOs, companies raise capital through other means as well such as rights offering or the rights issue. The rights issue is the issue of shares to existing shareholders by the company. The rights issue is done by allotment of shares on the basis of shares already owned by shareholders. The proportion or ratio is defined by the issuing company before the rights issue.
Suppose a company declares that it will issue at 1:2 proportion. It means that it will issue 50 shares to an existing shareholder who already owns 100 shares of the company.
Another method is the issuance of preferential shares. Preferential shares are those shares which the company issues directly to the preferred investors. These preferred investors usually are the fund houses, banks, hedge funds etc. Preferential share issues are not open to the common public.
Companies may raise capital through Private placements also. Private placements are opportunities given by the company to fund houses and banks by issuing shares at mutually agreed share prices.
The Government also issues bonds at current interest rates at the time of bond issuance. These bonds can be of long-term or short-term maturity types. Bonds are issued at Primary markets only because investors buy these from the issuer directly.
What is Secondary Market?
The Secondary market is the market where shares are traded and change hands at the market price. It is commonly referred to as the stock market.
In India, we have exchanges where shares and other securities are traded. Some of these are NSE, BSE, MCX, NCDEX etc. All these exchanges do not function in similar ways because their products vary. Company shares change hands in NSE and BSE only.
Except for shares, investors trade bonds, mutual funds, ETFs (Exchange Traded Funds) etc in secondary market. These trades in the secondary market allow investors to acquire more shares at the current market price (CMP) or sell shares to other investors. These changes of hands of shares allow the market capitalisation of the company to increase or decrease.
Constitutionally, the Primary and Secondary markets vary a lot. Unlike the Primary market, companies can not raise capital through the Secondary market.
How do the Primary market and Secondary markets function?
Proper functioning of the Primary and Secondary Markets is a must for the capital market to function properly. Companies float shares for the first time in the Primary market through IPO.
After IPO, the shares come into the Secondary market and are traded among the market participants.
This is how the Primary and Secondary markets basically function.
Difference between Primary and Secondary Market
The main differences between the Primary and Secondary markets are shortlisted below.
- The Primary market is known as NIM (New Issue Market) but the Secondary market is known as Aftermarket.
- Investors purchase shares directly from the company in Primary market, but in Secondary market, shares are traded among investors and traders.
- By design, the number of shares bought by investors (and sold by the company) in primary market is fixed and is often very small compared to the volumes garnered in the secondary market.
- Companies raise funds through Primary market and get financed but subsequent trading of shares in secondary market doesn’t offer any financing to the company. However, high stock prices in the secondary market may help companies in boosting valuations and in raising additional capital in future.
- In Primary market, the underwriters act as intermediaries but brokers are the intermediaries in Secondary market.
- The price range of shares remains fixed or kept in a tight range in the Primary market but share prices fluctuate a lot in the Secondary market.
|Primary Market||Secondary Market|
|Securities are created for the first time in primary market.||In secondary market, earlier-created securities only are traded among investors.|
|Primary market is also called New Issue Market.||Secondary market is aftermarket in nature.|
|There is lot of regulatory oversight in the primary market, especially related to the processes.||Regulations are mostly operational in nature in the secondary market.|
|In primary market, investors deal directly with the issuer i.e. a company or a government.||Investors trade securities among themselves in secondary market.|
|Issuers get direct monetary benefits from the primary market in the form of finance.||Since the securities are traded among investors, issuers don’t get direct benefit from the secondary market.|
|Prices in primary market are either fixed or kept in a narrow range.||Secondary market is characterized by fewer pricing controls and is largely left to the market forces of demand and supply.|
|Investor participation in the primary market is limited.||Secondary market is wider in terms of investor participation.|
|Primary market has underwriters acting as intermediaries.||Brokers act as intermediaries in the secondary market.|
|Trading volumes in primary market are quite less.||Secondary market has high trading volumes as same shares/instruments are traded multiple times.|
Primary vs secondary market – Wrapping up
As one can see, it is not really a Primary vs Secondary market debate and both constituents complement each other. Without a primary market, there can not be a secondary market. Similarly, primary market can not survive without an active secondary market. The stock exchanges are part of Secondary market where share trading takes place regularly. Once shares are acquired in Primary market through IPO or Rights offer, an investor sells the shares to others in Secondary market. Looking back at the article, we can see how these two markets are interrelated in spite of their differences.