The primary market refers to the market where new securities are issued for the first time, such as stocks, bonds, and other financial instruments. In this market, companies raise capital by selling their securities directly to investors, bypassing any intermediaries. The primary market is also called the "new issue market."
On the other hand, the secondary market refers to the market where existing securities are traded among investors. This includes the buying and selling of stocks, bonds, and other financial instruments that have already been issued in the primary market. The secondary market provides investors with liquidity, as they can easily buy and sell securities that they own.
Primary Markets
When a company decides to raise capital by issuing new securities, it can do so through a variety of means, such as an initial public offering (IPO), a private placement, or a rights issue. Let's consider an IPO as an example.
An IPO occurs when a company offers its shares to the public for the first time. Before the IPO, the company was privately owned, and its shares were only held by a small group of investors, such as its founders, employees, and venture capitalists.
To launch an IPO, the company hires an investment bank to underwrite the offering. The investment bank helps the company determine the number of shares to be sold, the price per share, and the timing of the offering. The investment bank also markets the shares to potential investors, such as institutional investors and retail investors.
On the day of the IPO, the shares are sold to investors in the primary market. The investors who purchase the shares are buying them directly from the company, and the company receives the proceeds from the sale. The shares can be bought and sold on the secondary market after the IPO, but any subsequent trades do not provide capital to the company.
Secondary Markets
Let's assume that a company ABC completed its IPO a year ago, and its shares are now trading on a stock exchange such as the New York Stock Exchange (NYSE). In the secondary market, the shares of ABC are bought and sold among investors, without the involvement of the company itself.
Suppose an investor named John wants to buy 100 shares of ABC. He can purchase the shares through a broker, who will execute the trade on his behalf. The broker will find a seller willing to sell 100 shares of ABC at the prevailing market price, and then the shares will be transferred to John's account once the trade is completed. John can hold the shares in his account or sell them in the secondary market later.
Similarly, let's assume that another investor named Sarah wants to sell 50 shares of ABC. She can also work through a broker, who will execute the trade on her behalf. The broker will find a buyer willing to purchase 50 shares of ABC at the prevailing market price, and then the shares will be transferred from Sarah's account to the buyer's account once the trade is completed.
Comments
Post a Comment