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Primary and Secondary Market

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Primary and Secondary Market Essay

Primary Market

In primary market, the securities are created by the company for trading purpose to the investor. In the primary market, companies will issue or sell their stocks and bonds for the first time to the public to raise the funds. The best example for the primary market is initial public offer. Here, for a particular stock banks will do the initial underwriting for investors to buy the securities and it is a better opportunity to buy the securities from the bank. An initial public offer will appear only when the private companies issues their shares or stocks to the public for the first time. Underwriting is the process of issuing the new shares to the investors.

Primary market includes 2 types of stocks which can be offer to the investor namely,

  1. Private placement: Private placement means company will issue or sell their shares to the specified investors, before their shares accessible by the public.
  2. Preferential allotment: Preferential allotment means companies will issue the shares to the investors at a price which is already specified by the company, but that type of shares which is specified will not be able to access by the general public because it is costlier than the share which is available to the public. Important aspect in the primary market is that the investor can buy the securities directly from the issuing company.
  3. Right issue: In right issue company will issue the additional shares to the investor who are already having the share in the particular company and it is offered to the existing shareholders of the company at a predetermined price. Here, investors need not to pay any tax on their dividends.
  4. Public issue: In public issue company will issue the shares to the qualified participants in issuing process of the securities in the market.

Following are some of the features of primary market:

  1. Primary market issues the new stock and bonds to the new investors to raise the fund for their business expansion.
  2. Investors can buy the stocks or bonds directly from the issuing company.
  3. It hires or appoint the investment bankers to acquire a large number of institutional investors.
  4. Primary market is also known as “New Issue Market”.
  5. This is the market for new long term equity capital.
  6. In primary market there is no possibility of getting new long term external finance.
  7. Primary market involves investment banking to sell or buy the new common stock to the investors with the help of underwriting.

Methods of issuing securities in the primary market are:

  1. Initial public offering.
  2. Rights issue.
  3. Preferential issue.

Secondary Market

Secondary market is the market where buy or sell the shares or bonds which are already traded in the primary market. In secondary market companies will not have any direct relation to the secondary market while investors are trading their securities in the open market. There are more number of trading will be done in the secondary market compare to that of primary market. In secondary market, it includes the equity market and debt market. Following are the two kinds of secondary market:

  1. Auction market: Auction market is the place of market where the buyers and sellers will announce the price of their stock or shares in publically, the investors who wants to buy that securities in this market have to tell or bid their price and how much they willing to pay on that securities, this process is called as bid and ask price. If the buyer and seller want to buy the securities in this auction market both have to be mutually agree with their prices. The best example for this auction market is New York Security Exchange.
  2. Dealer market: In the dealer market, there is no need of all the parties have at a single place for trade their securities. Here, through electronic network participants or parties can be able to buy or sell their securities with one another and they can be connected through network how long as possible. Dealer will earn the profits through spread between the price. Here, the spread means the difference between the bid price and ask price.

Following are some of the features of secondary market:

  1. In secondary market there is no need of involvement of companies while investors are trading.
  2. Small investors have the opportunity to buy or sell their securities in secondary market because it offers the securities at lower price or affordable price.
  3. In secondary market, everyone who are eligible to buy the shares or securities, at how much they willing to pay for that securities.
  4. In the secondary market, broker will buy or sell the stocks or shares on behalf of the investor with some percentage of commission.
  5. In secondary market, transaction of the securities is done through the stock exchanges.
  6. Secondary market creates the liquidity in securities.
  7. It encourages the new investors to buy or sell the securities.
  8. In secondary market, the cost for every transaction of their securities will low or less.
  9. Secondary market helps the investors in saving their capital and also in investment of their capital on the securities.
  10. In secondary market, the share or bonds will be traded which are already traded in the primary market.

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