Primary Market and Secondary Market
Companies raise short term funds through the money market. But when the requirements are for long term, this is where the capital market comes in picture. The capital market comprises of primary and secondary market.
Now let’s understand in depth about the primary and secondary market and what the difference between primary and secondary market is.
Primary Market and Secondary Market
Primary market is a place where securities are issued by the company for the first time to general public for raising funds in order to fulfill the long term capital requirement. Issues are made in various forms like public issues, offer for sale, rights issue, bonus issue, issue of IDR, etc.
While secondary market is a place where existing securities like shares, debentures, bonds, options, commercial papers, treasury bills, etc. are traded amongst investors. It is like an auction market where the trading of securities is done through exchange or a dealer (OTC).
Features of Primary market
- Primary market is a market for creation of long term capital.
- Fresh issue of securities takes place in primary market.
Features of secondary market
- Secondary market facilitates the liquidity and marketability of existing securities.
- Secondary market ensures a true and fair dealing for protection of the investor’s interest.
Difference between primary market and secondary market
The difference between the primary and secondary market mainly relates to the nature of financing and the organizations involved. The basic differences between the two types of market are as follows:
- The securities that are formerly issued in a market are referred to as primary market, whereas, when the company gets listed on a recognized stock exchange for trading, then the stocks are traded in secondary market.
- 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. While in primary market the prices are fixed.
- The primary market provides financing to the new and the old companies for their expansion and diversification while the secondary market does not provide financing to companies as they are not involved in any transactions.
- In primary market the investors can purchase the shares directly from the company, whereas in secondary market, the investors buy and sell the securities (shares and bonds) among themselves.
- In case of primary market, investment bankers do the selling. Conversely in secondary market, the broker acts as an intermediary while the trading is done.
- In primary market, the company will gain from the sale of security. While in secondary market, investor will gain from the securities.
- The securities in the primary market can only be sold once, while in secondary market it can be done an infinite number of times.
- The amount that is received from the securities becomes the capital for company whereas; in case of secondary market same is the income of investors.
- Hence, from the above pointers we conclude that the two financial markets (primary market and secondary market) play a major role in the mobilization of money in the country’s economy. The primary market encourages a direct interaction with the company and the investor. While, secondary market is where brokers help out the investors to buy and sell the stocks among other investors.
The process to buy Equity in secondary market is very easy. 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 and trading account.
- The broker buys or sells the shares by executing orders on the electronic terminal provided by the stock exchange.
- 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 investor.
- Order gets executed on the final settlement date (T+2).
I hope the above details clarified your doubts and made you understand the concepts of primary market and secondary market. Now as you know about the primary and secondary market you will also be interested to know that there is also a third market and forth market, but these are rarely been heard. In the third and the fourth market transactions happen between the dealers and the brokers and the large institution of high volume using Over the Counter (OTC) network.
The third party caters the transactions between dealer or broker and the large institution, but the fourth market caters only the transactions between large institutions. The transactions happening in these markets are always of high volume.