Difference Between Primary Market and Secondary Market

The primary market is where securities are created. Here securities are issued by companies for the first time. New stocks and bonds are offered to the public via an initial public offering (IPO). The secondary market, on the contrary, refers to exchanges such as BSE or New York Stock Exchange or Nasdaq where stocks are traded.

A company may have different types of capital requirements depending on its present stage of growth. A well-established company may not require long-term capital. In that case, they may opt for equity financing i.e. raising capital via the sale of shares.

But another company, which has a proven track record and now wishes to expand operations may go for an IPO. While equity financing is a secondary market operation, launching an IPO happens in the primary market.

Let’s understand the feature of primary and secondary market:

Features of Primary Market

  • Like we discussed earlier, a company tends to turn to the primary market for its long term capital needs. Fulfilling the need for long term capital is therefore a feature of a primary market.
  • A fresh issue of securities takes place in the primary market. The buyers are usually institutional investors and retail investors.

Features of Secondary Market

  • The secondary market helps companies fulfil short-term liquidity requirements. It facilitates the marketability of existing securities.
  • It also ensures true and fair dealing for the protection of the investor’s interest.

Primary Market vs Secondary Market

  • Securities that are issued in a market are referred to as the primary market. When the company gets listed on an exchange the stocks are then traded in the secondary market.
  • The primary market is also known as a new issue market and the secondary market is known as after issue market. Depending upon the demand and supply of the securities traded the prices in the secondary market vary. But the prices in the primary market are fixed.
  • Unlike the secondary market, the primary market provides financing to the new and the old companies.
  • In the primary market, investors have an option to purchase the shares directly from the company, whereas in the secondary market, the investors buy and sell the securities among themselves.
  • Investment bankers do the selling in a primary market. In the secondary market, the broker acts as an intermediary while the trading is done.
  • In the primary market, the company stands to gain from the sale of security. While in the secondary market, an investor gains from the securities.
  • The securities in the primary market can only be sold once, while in the secondary market sale and purchase is an ever-going process.
  • The amount that is received from the securities becomes capital for a company whereas; in the case of the secondary market, the same reflects as the income of investors.

The two financial markets -- primary market and secondary market, play a major role in the mobilization of money for companies that help move the wheels of the economy. Countries with robust financial markets make it easier for companies to access funds and grow faster.

The primary market encourages direct interaction with the company and the investor while the secondary market is where brokers aid investors to buy and sell the stocks. Also, the process to buy equity in the secondary market is fairly simple. The following procedure is followed while buying or selling shares in the secondary market:

  • Open Demat Account with a depository participant (DP).
  • Open a trading account with a broker.
  • Link your bank account with Demat account and Trading Account.
  • The broker buys or sells the shares by executing orders on the electronic terminal
  • A contract note is issued by the broker detailing the value of shares purchased plus his brokerage cost.
  • The broker collects shares via settlement process (T+1) and makes payment on the behalf of the investor.
  • Order gets executed on the final settlement date (T+2).

Conclusion

The basic difference between the primary and secondary market lies in the type of companies and investors it caters too. Companies looking for long term investments for an IPO which is a function of the primary markets, while companies that look for short-term capital use the secondary market. Now that you have a sense of the functionalities of both these markets, you can try your hand at investing by opening an online Demat account.

Open Demat Account at IIFL