Who trades in primary and secondary capital markets?

Securities are sold on the capital market. Primary and secondary markets for securities trading
have different purposes. Primary markets sell the securities initially, and secondary markets
allow investors to buy, sell and trade securities among themselves after the securities are sold
on the primary market. An initial public offering, or IPO, is an example of a primary market.
These trades provide an opportunity for investors to buy securities from the bank that did the
initial underwriting for that particular stock. Any trading that occurs afterward between investors
is part of the secondary securities market. All capital market securities are sold in either the
primary or secondary market. Besides stocks, many other financial products are also sold on
the capital market, including mortgage loan products and bonds.

Primary markets offer several ways for companies to raise capital. These include public issue,
rights issue, private placement and preferential allotment. Public issue allows companies to offer
securities directly to the public. Rights issue permits companies to raise additional equity
through the primary market after already having securities enter the secondary market. Current
investors are offered prorated rights based on the shares they currently own, and others can
invest anew in newly minted shares. Private placement allows companies to sell directly to more
significant investors such as hedge funds and banks without making shares publicly available.
Preferential allotment offers shares to select investors at a special price not available to the
general public. Hedge funds, banks and mutual funds are frequently provided with special
pricing and buying opportunities, and preferential allotment is a common example.

While primary and secondary markets represent a significant amount of securities trading, other
capital markets exist that are often called third or fourth markets. These represent private
trading between major banks and other significant investors and are high sales volume
transactions.

Secondary market

The secondary market, also called the aftermarket, is the financial market in which previously
issued financial instruments such as stock, bonds, options, and futures are bought and sold.
Another frequent usage of "secondary market" is to refer to loans which are sold by a mortgage
bank to investors such as Fannie Mae and Freddie Mac.
The term "secondary market" is also used to refer to the market for any used goods or assets,
or an alternative use for an existing product or asset where the customer base is the second
market (for example, corn has been traditionally used primarily for food production and
feedstock, but a "second" or "third" market has developed for use in ethanol production).

With primary issuances of securities or financial instruments, or the primary market, investors
purchase these securities directly from issuers such as corporations issuing shares in an IPO or
private placement, or directly from the federal government in the case of treasuries. After the
initial issuance, investors can purchase from other investors in the secondary market.

DIFFERENCE BETWEEN PRIMARY MARKET AND SECONDARY MARKET

There are two types of Capital Market, from where an investor can deal in securities, they are
Primary Market and Secondary Market. The former is a market where securities are offered for
the first time for receiving public subscription while the latter is a place where pre-issued
securities are dealt between the investors. These two markets are juxtaposed with each other,
and so we have compiled a detailed article to clarify the difference between Primary Market and
Secondary Market, in tabular form.

Content: Primary Market Vs Secondary Market

Comparison Chart

Definition

Key Differences

Conclusion
Comparison Chart

BASIS FOR COMPARISON PRIMARY MARKET SECONDARY MARKET

Meaning The market place for new shares is called primary market. The place where
formerly issued securities are traded is known as Secondary Market.

Another name New Issue Market (NIM) After Market

Type of Purchasing Direct Indirect

Financing It supplies funds to budding enterprises and also to existing companies for
expansion and diversification. It does not provide funding to companies.

How many times a security can be sold? Only once Multiple times

Buying and Selling between Company and Investors Investors

Who will gain the amount on the sale of shares? Company Investors

Intermediary Underwriters Brokers

Price Fixed price Fluctuates, depends on the demand and supply force

Organizational difference Not rooted to any specific spot or geographical location. It has
physical existence.

Definition of Primary Market

A primary market is a place where companies bring a new issue of shares for being subscribed
by the general public for raising funds to fulfil their long-term capital requirement like expanding
the existing business or purchasing new entity. It plays a catalytic role in the mobilisation
of savings in the conomy.

Various types of an issue made by the corporation are a Public issue, Offer for Sale, Right
Issue, Bonus Issue, Issue of IDR, etc.
The company who brings the IPO is known as the issuer, and the process is regarded as a
public issue. The process includes many merchant bankers (investment banks) and
underwriters through which the shares, debentures, and bonds can directly be sold to the
investors. These investment banks and underwriters need to be registered with SEBI (Securities
Exchange Board of India).

The public issue is of two types, they are:

Initial Public Offer (IPO): Public issue made by an unlisted company for the very first time,
which after making issue lists its shares on the securities exchange is known as the Initial Public
Offer.

Further Public Offer (FPO): Public issue made by a listed company, for one more time is
known as a follow-on offer.

Definition of Secondary Market

The secondary market is a type of capital market where existing shares, debentures, bonds,
options, commercial papers, treasury bills, etc. of the corporates are traded amongst investors.
The secondary market can either be an auction market where trading of securities is done
through the stock exchange or a dealer market, popularly known as Over The Counter where
trading is done without using the platform of the stock exchange.

The securities are firstly offered in the primary market to the general public for a subscription
where the company receives the money from the investors and the investors get the securities;
thereafter they are listed on the stock exchange for the purpose of trading. These stock
exchanges are the secondary market where maximum trading of the company is done. The top
two stock exchanges of India are Bombay Stock Exchange and National Stock Exchange.

An investor can trade in securities through the stock exchange with the help of brokers who
provide assistance to their client for purchasing and selling. The brokers are the registered
members of the recognised stock exchange in which the investor is trading his / her securities.
The brokers are allowed to trade on the advanced trading system. The SEBI issues a certificate
of registration to the member brokers through which an investor can identify whether a broker is
registered or not.
Key Differences Between Primary Market and Secondary Market

The points given below are noteworthy, as far as the difference between primary market and
secondary market is concerned:

The securities are formerly issued in a market known as Primary Market, which is then listed on
a recognised stock exchange for trading, which is known as a secondary market.

The prices in the primary market are fixed while the prices vary in the secondary market
depending upon the demand and supply of the securities traded.

Primary market provides financing to new companies and also to old companies for their
expansion and diversification. On the contrary, secondary market does not provide financing to
companies, as they are not involved in the transaction.

At the primary market, the investor can purchase shares directly from the company. Unlike
Secondary Market, when investors buy and sell the stocks and bonds among themselves.

Investment bankers do the selling of securities in case of Primary Market. Conversely, brokers
act as intermediaries while trading is done in the secondary market.

In the primary market, security can be sold only once, whereas it can be done an infinite number
of times in case of a secondary market.

The amount received from the securities are income of the company, but same is the income of
investors when it is the case of a secondary market.

The primary market is rooted in a particular place and has no geographical presence, as it has
no organisational setup. Conversely, Secondary market is present physically, as stock
exchnage, which is situated in a particular geographical area.

Conclusion

The two financial markets play a major role in the mobilisation of money in the countrys
economy. Primary Market encourages direct interaction between the company and the investor
while the secondary market is opposite where brokers help out the investors to buy and sell the
stocks among other investors. In the primary market bulk purchasing of securities is not done
while secondary market promotes bulk buying.