Primary market and secondary market are two common terms used in the financial market. Though both are important for investors to trade securities, they are vastly different in terms of functionality, operation, and regulation. In this article, we will take a closer look at these two markets, their differences, and their significance in the finance world.
The primary market is also referred to as the new issue market. It is the market where new securities are offered by companies to the public for the first time. This primary issuance can be done via an initial public offering (IPO) or a seasoned equity offering (SEO). The primary market activities are regulated by the Securities and Exchange Board of India (SEBI).
The primary market is where companies get funds from the public to invest in their projects, business expansion, or to repay their debts. As the primary market is the first time a security is being offered for public subscription, it is an essential market for companies, investors, and the economy.
The securities issued in the primary market can be either equity shares, debentures, bonds, warrants, or any other instruments that can be traded in the stock market. The price of the securities is decided by the company based on market demand, market trends, and other factors.
Primary market activities involve a number of participants – the issuer of the securities, investment bankers, financial advisers, underwriters, and regulatory bodies, among others. After the securities are issued, the securities are listed on the stock exchange for trading.
The secondary market is where securities that have already been issued are traded between investors, without any involvement of the issuing company. In other words, it is a market for buying and selling securities that have already been issued in the primary market.
The secondary market is also known as the resale market, and it is regulated by the Securities and Exchange Board of India (SEBI). The major participants in the secondary market are investors, brokers, dealers, and market makers.
The market price of each security in the secondary market is determined by the forces of supply and demand. The value of the securities fluctuates continuously based on various factors like changing market trends, company performances, industry conditions, and economic conditions.
As the securities have already been issued in the primary market, the secondary market provides liquidity to investors who can buy or sell securities at any time depending on the market conditions. This liquidity helps investors to get immediate cash flow and also helps maintain the demand-supply equilibrium in the market.
Difference between Primary Market and Secondary Market
The primary market and secondary market are distinctive in terms of functionality, operation, and regulation. Here are the main differences between them:
1. Issuing of Securities
In the primary market, securities are issued for the first time by the companies. The securities are offered to the public to raise funds for the company’s projects or to repay debt. On the other hand, in the secondary market, the securities that have already been issued in the primary market are traded between investors without any involvement of the issuing company.
The main participants in the primary market are the issuing company, investment bankers, underwriters, financial advisers, and regulatory bodies. In contrast, the secondary market involves investors, brokers, dealers, and market makers.
The primary market is essential for companies to raise funds from the public and to invest in their projects. The primary market also provides an opportunity for investors to invest in new securities before they hit the secondary market. On the other hand, the secondary market provides liquidity to investors and allows them to buy and sell securities based on the current market value.
4. Price Determination
In the primary market, the price of the securities is decided by the company based on market trends, demand and supply, and other factors. On the other hand, in the secondary market, the price of securities is determined by the forces of supply and demand.
5. Regulatory Framework
The activities in the primary market are regulated by the Securities and Exchange Board of India (SEBI). In contrast, the secondary market is also regulated by SEBI. However, the regulatory framework in the secondary market is more comprehensive, as there is more possible financial misconduct, such as insider trading, price manipulation, and false reporting.
In summary, the primary market and secondary market are necessary for the smooth functioning of the financial market. Both markets play an important role in the economy, offering an opportunity to investors to earn a reasonable return on their investments and companies to raise funds for their projects. As an investor, it is important to understand the differences between these two markets to make informed investment decisions that will lead to long-term financial success.