Difference between Primary and Secondary market
The term market in the finance world usually refers to both – primary market and the secondary market. Both markets are part of the capital market. Primary Market is a part of the capital market in which entities like companies, governments and other institutions obtain funds through the sale of debt and equity-based securities.
With raising an Initial Public Offering (IPO), when a company decides to go public for the first time, it is done in the primary market. It is also called the New Issue Market (NIM) as the securities are sold for the first time in the primary market.
The secondary market is the place where investors and traders trade in securities. This is done after the Initial Public Offer (IPO) is over and the shares are sold in the primary market.
Primary market vs Secondary market
|Basis of Comparison||Primary Market||Secondary Market|
|Meaning||A platform that offers security for the first time is the primary market.||The market where investor’s trade already issued securities is known as the secondary market.|
|Another name||New issue market (NIM).||Aftermarket or share market.|
|Type of product||Products are limited, and mainly include IPO and FPO (Follow-on Public Offer).||Many products are available such as shares, warrants, derivatives and more.|
|Purchase type||All the purchases in this market happen directly.||The issuer (company raising capital) is not involved in the trading.|
|Frequency of selling||Security can be sold to the investors just once in this market.||Here the traders can buy and sell the shares as many times they want.|
|Parties involved||Company and the investors are involved in buying and selling the security.||Here investors buy and sell the securities among themselves.|
|How to identify investment?||Investors primarily rely on prospectus and word-of-mouth publicity to pick an investment in the primary market.||Several tools are available to the investors to help them pick good investments, such as price to earnings (P/E), price to book (P/B), price to sales (P/S) and more.|
|Intermediary||Underwriters are the intermediaries in the primary market.||Here the intermediaries are the brokers.|
|Purpose||Help new and existing companies to raise capital for expansion and diversification.||Does not provide funding to companies; rather help investors to make money.|
|Price||The company sells the shares to the investors at a fixed price.||Both buy and sell-side investors work towards finding the best price for the trade.|
|Presence||There is no organization set up for the primary market||There are a geographical setup and organizational presence for the secondary market.|
|Rules and Regulations||The company issuing securities goes through a lot of regulation and due diligence.||Here investors and brokers need to follow the rules set by the exchange and the governing agency.|