Difference between Primary and Secondary Market

The primary market and secondary market are two platforms where securities are exchanged. Here’s everything you need to know about these two markets.
OPEN ACCOUNT
Difference between Primary and Secondary Market
OPEN ACCOUNT
3 mins read
25 December 2024

Key takeaways

  • The primary market is where new securities (stocks, bonds, etc.) are issued and sold for the first time, typically through initial public offerings (IPOs).
  • The secondary market, on the other hand, is where already issued securities are bought and sold by investors.
  • The secondary market where investors buy and sell existing securities, including exchanges like the National Stock Exchange (NSE) & Bombay Stock Exchange (BSE).

The Indian capital market can be classified into two major segments — the primary market and the secondary market. Although they work very differently, the main objective of these two types of markets is the same — to act as platforms for the exchange or trade of financial securities between buyers and sellers.

Financial securities like stocks, bonds, debentures, and mutual funds are traded in the primary and secondary markets. As an investor, it is crucial to know what these two markets are, their features, and the difference between the primary and the secondary markets.

What is the primary market?

The primary market represents a platform where securities such as equity shares, bonds, and debentures are issued to the general public for the first time. The exchange of securities in a primary market happens directly between the investors and the company issuing the securities.

Since the proceeds from the issue of these securities generally go directly to the issuing entities, the primary market is one of the best ways for companies to raise capital. The funds raised in the primary market can be used to meet the various funding requirements of a company. They include debt repayment, business expansion, and launching new product lines.

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Features of primary market

Several key features define the primary market. Let’s look at some of them before moving on to the differences between the primary and the secondary markets.

1. Issue of new securities

The primary market enables companies and other entities to issue new securities to the public. In most cases, the entities offering securities for the first time often are relatively new or lesser-known.

2. Fundraising platform

The primary market provides companies with a platform to raise funds from external investors. Unlike fundraising through debt, the proceeds that a company receives from a primary market issue don’t need to be repaid.

3. Regulatory compliance

The regulatory requirements associated with the primary market are often very stringent. A company that wants to raise funds through the issue of securities in the primary market has to satisfy many strict regulatory requirements issued by the SEBI.

4. Freedom to determine the price

A company that issues securities through the primary market has the freedom to determine the issue price. The factors determining the issue price include the company’s fundamentals, future growth potential, market conditions, investor sentiment, and demand and supply.

What is the secondary market?

The secondary market is a platform where securities previously issued via the primary market are traded freely between investors. Here, the exchange of securities happens between investors without the involvement of the company or the issuing entity. This effectively means that the proceeds from the transactions in a secondary market go directly to the selling investors and not to the issuing company.

Features of secondary market

Let’s quickly look at the key features of the secondary market before delving into the primary market and secondary market differences.

1. No Impact on the issuing company’s financials

Since trading on the secondary market happens between investors, the issuing company is not impacted in any way. Any change in the share price due to secondary market trading neither affects the financial situation nor the capital structure of the issuing company.

2. Liquidity for investors

The secondary market helps infuse liquidity by providing a platform for interested investors to buy and sell securities freely. It enables existing investors to monetise their investments in a company.

3. Price discovery

The forces of demand and supply primarily determine the price of a security in the secondary market. This, combined with other factors like investor sentiment, economic conditions, and the company’s financial performance, facilitates efficient price discovery.

4. Regular trading

Unlike the primary market, where the securities are open for subscription only for a short period, trading in the secondary market happens continuously. Interested investors can purchase and sell securities anytime during the market hours.

Key difference between primary and secondary market

Now that you know what the primary market and the secondary market are, let’s do a quick comparison of these two types of financial markets.

Particulars

Primary market

Secondary market

Purpose

To enable companies to raise funds through the issue of securities

To provide liquidity by enabling the exchange of securities between investors

Parties involved

The exchange of securities happens between the company issuing them and the investors

The exchange of securities happens between interested investors

Type of securities exchanged

Securities issued for the first time

Securities previously issued through the primary market

Price

The price fixed by the company issuing the securities

The price of securities fluctuates based on the forces of demand and supply

Sale of securities

Securities are sold only once during the subscription period

Securities are bought and sold continuously as long as they are listed on the stock exchanges

 

Conclusion

To sum up, the primary market and secondary market are two integral parts that make up the Indian financial market. They facilitate the easy and efficient exchange of securities between selling and buying entities.

As an investor, you have the freedom to invest in either or both of these markets as long as you have a demat account. However, before you invest your capital, it is advisable to thoroughly analyse the various risks involved with investing in these markets. This simple exercise will help you make well-informed investment decisions.

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Frequently asked questions

What is the difference between primary market and secondary market?

In the Indian stock market, the primary market is where companies first issue shares (IPO) to raise capital. Think of it as a company's welcome party. The secondary market, like the NSE or BSE, is where investors buy and sell existing shares among themselves. This is the ongoing trading scene.

What is the difference between primary and secondary markets in ETF?

ETFs trade in the secondary market just like regular stocks. The primary market comes into play when a new ETF is launched, where investment firms create and sell units to authorised participants. But everyday trading of those ETF units happens in the secondary market.

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