In the previous posts, we discussed what the share bazaar is and how to make money from it. In this article, we will discuss the different types of markets and mainly focus on the primary market and secondary market.
What is the Primary Market?
The primary market is a market where companies bring their issue or initial public offering (IPO). Here, stocks are created. When a company decides to go public by raising an IPO, they do it in the primary market. Here, a company sells its shares directly to the investors.
How Does the Primary Market Work?
In the primary market, investors buy shares directly from the company. For instance, a person, say his name is Vinod, can directly buy shares from a company, say Reliance Industries.
What is the Secondary Market?
On the other hand, if you want to purchase a share that you have not purchased in the IPO, you can do so in the secondary market. The secondary market is a market where traders buy and sell shares among themselves. Here, traders trade the stocks.
How Does the Secondary Market Work?
In the secondary market, the share-issuing company is not involved directly in any transactions. So here, Vinod can buy or sell shares to another person, say, Nikhil. In the secondary market, various participants like foreign or domestic institutions, banks, companies, high net-worth investors, small traders, etc. are involved. Everyone here is either purchasing something or selling something. So, it is like a full-fledged market.
Differences Between the Primary Market and Secondary Market
Some major differences between the two types of markets are:
- In the primary market, companies can sell their shares only once, whereas in the secondary market, investors can buy or sell shares multiple times.
- In the primary market, companies fix the price, but the price in the secondary market varies depending on the demand and supply of the company’s share.
- The primary market has no physical location, but the secondary market has a physical location, like the National Stock Exchange or Bombay Stock Exchange are the markets where the shares are traded in India.
The primary market deals with the issuance of new securities by companies or governments. In contrast, the secondary market facilitates trading in already existing securities such as stocks and bonds.
A primary market is a place where companies create new securities, like when a company issues shares for an Initial Public Offering (IPO). Investors can purchase these newly-issued shares directly from the issuer.
Secondary markets involve buying and selling of existing financial instruments, such as stocks or bonds which are already trading prior to that day’s transaction. This trading takes place on exchanges like BSE and NSE in India.
Under SEBI regulations all entities involved in issuing and/or trading equity/derivative instruments must either register themselves as a member/sub-broker, stockbroker, or merchant banker amongst other categories. This will ensure the safety of investors participating in this marketplace. The rules underpinning both the Primary Market – at the time of initial offering -and Secondary Markets are governed by SEBI’s guidelines respectively written for each realm.
In conclusion, the primary market is where stocks are created, and in the secondary market, the stocks are traded. Both types of markets have their unique characteristics, and investors need to understand the differences between them to make informed investment decisions. By knowing the differences, investors can also choose the type of market that suits their investment goals and risk appetite.