Primary vs Secondary Market (Finance) - Explained
What are Primary and Secondary Markets?
Written by J. Mance Gordon
Updated at April 23rd, 2024
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What are Primary and Secondary Capital Markets?
A capital market is a financial procedure, system, institution, or places where people engage in the exchange of financial securities. The capital market allows sellers or suppliers to raise capital from the sale of stocks, bonds, shares and other investments that they transfer to buyers who need them. The capital market consists of the primary capital market and secondary capital market. New financial securities are traded in the primary capital markets while old or used securities are traded in the secondary markets.
How Do Primary and Secondary Markets Work?
Primary Capital Markets
The primary capital markets trade in new stock or securities which they transfer to interested buyers or companies through an initial public offering (IPO). Securities dealers, finance syndicates or investment bankers are hired by the seller to review the securities, the price of the securities and other important details. Securities trading in the primary capital market are subject to the regulation and approval of the Securities and Exchange Commission (SEC) and other securities agencies. There is price volatility in the primary markets. Companies issuing the securities in this market always want to the securities within a short period of time, so they market to large investors who can buy more securities at once. This is due to price volatility in primary markets.
Secondary Capital Markets
Secondary capital market is also called the stock market, it is where already-used stocks are traded between investors. Unlike in primary capital market where investors buy directly from the seller, investors trade securities they already own in the secondary market. Secondary capital markets are not bounded by IPOS, any investor can trade or purchase securities in this market. The New York Stock Exchange (NYSE), London Stock Exchange, and Nasdaq are examples of secondary markets. Unlike primary market where companies want to sell their securities in a short period of time to meet the required volume, the volume of securities traded in secondary market is determined by the fluctuation or stability or demand and supply and this also affect security price. The secondary market is categorized into the auction and the dealer markets.