Primary Market and Secondary Market Explained

6 min read

What is a Primary Market?

The primary market is where companies and governments first sell stocks, bonds, and other securities to the public through an initial public offering (IPO). Another term used for the primary market is the New Issue Market (NIM).

It is not a physical location but rather a market where new securities are created and sold by the issuer, with the help of investment banks who set an initial price range for the securities and oversee the sale process.

Once all the securities are sold in the primary market, they start trading on the secondary market, where investors can buy and sell them from each other. But in the primary market, investors buy securities directly from the banks underwriting the IPOs.

For example, a new company called XYZ Inc. wants to raise money to expand its business. They may decide to sell stocks for the first time through an IPO on the primary market. Investors can then buy these stocks directly from the bank underwriting the IPO. After the IPO is complete, these stocks start trading on the secondary market.

A primary market is an excellent place for investors to buy stocks and bonds because studies have shown that the average IPO outperforms the broader stock market. However, investors must be careful and do their due diligence before investing in IPOs, as not all IPOs will perform well.

Types of Primary Markets:

  • Initial Public Offering (IPO): When a company offers shares of stock to the public for the first time in order to raise money.
  • Rights Issue/Offering: When a company offers its existing stockholders the opportunity to purchase new shares at a discounted price in order to raise more money.
  • Private Placement: When a company sells its shares to a select group of investors or individuals instead of issuing them in the public market.
  • Preferential Allotment: When a particular group is offered shares at a special or lower price than the publicly traded share price.

What is a Secondary Market?

In the secondary market, investors buy and sell securities that have already been issued, like stocks and bonds. Another term used for the secondary market is the After Issue Market (AIM).

When investors trade in the secondary market, they do it among themselves, without the involvement of the issuing company.

For example, if you want to buy Berkshire Hathaway (NYSE: BRK.A) stock, you will buy it from another investor who owns shares in Berkshire Hathaway, not from Berkshire Hathaway itself.

The secondary market is important because it provides liquidity for investors to buy and sell securities at a market-determined price. For instance, bondholders can sell their bonds on the secondary market to other investors at a higher price if interest rates have decreased since the bond’s issuance. This can result in a tidy profit for the seller as the bond becomes more valuable due to its higher coupon rate.

Types of Secondary Markets:

The secondary market is divided into two types: auction markets and dealer markets

  • In an auction market, buyers and sellers come together in one place to announce the prices at which they are willing to buy and sell securities. The New York Stock Exchange (NYSE) is an example of an auction market.
  • In contrast, a dealer market doesn’t require buyers and sellers to be in the same place. Dealers hold an inventory of securities and offer firm prices at which they are willing to buy and sell them through electronic networks. The Nasdaq (NASDAQ) is an example of a dealer market. The idea is that competition between dealers will lead to the best possible price for investors.

Differences Between Primary Market and Secondary Market

CriteriaPrimary MarketSecondary Market
Type of SharesFresh shares issued by the companyAlready issued or existing shares traded
Market NameNew Issue MarketAfter Issue Market
PurposeCompany receives funds for business expansionCompany does not receive funds
ExchangeSecurities issued by companies to investorsSecurities exchanged between buyers and sellers
PriceSecurities issued at one price for all investorsSecurities exchanged at the market price
LiquidityDoes not provide liquidityProvides liquidity
IntermediaryUnderwritersBrokers
Number of SalesSecurity can be sold only onceSecurities can be sold innumerable times

The OTC Market

When people talk about the OTC market, they refer to a type of market where trading happens through dealer networks instead of on a physical stock exchange like the NYSE or Nasdaq. This term originally meant a system where stocks were sold “over-the-counter” in stock shops rather than being listed on an exchange.

Today, the term OTC usually refers to stocks that are not listed on a major exchange, like the NYSE or Nasdaq. Instead, these stocks are traded on networks like the over-the-counter bulletin board (OTCBB) or the pink sheets. These networks provide pricing information for securities, but they are not actual exchanges and have fewer regulations than traditional stock exchanges.

However, it’s important to note that the Nasdaq, created initially as a dealer network, has since evolved into a major exchange. So while it technically falls under the OTC umbrella, it is inaccurate to say that it trades in unlisted securities. Most stocks on the OTC market are penny stocks or from small companies.

What are the Third and Fourth Markets?

The third market is where broker-dealers and big institutions trade stocks with each other, while the fourth market is where only big institutions trade with each other. These markets aren’t very interesting to regular individual investors because they involve trading large volumes of shares at once.

While most everyday investors won’t need to worry about the third and fourth markets, it’s good to know what they are. These markets don’t really impact the stock market activities of individual investors, but their names can sometimes help explain what’s happening in the financial world.

Key Takeaways

  • The primary market is where companies and governments first sell stocks, bonds, and other securities to the public through an initial public offering (IPO).
  • The primary market is where investors buy securities directly from the banks underwriting the IPOs, while in the secondary market, investors buy and sell securities from each other.
  • In the secondary market, investors buy and sell securities that have already been issued, like stocks and bonds.
  • The secondary market is divided into two types: auction markets and dealer markets.
  • The OTC market refers to a type of market where trading happens through dealer networks instead of on a physical stock exchange like the NYSE or Nasdaq.
  • The third market is where broker-dealers and big institutions trade stocks with each other, while the fourth market is where only big institutions trade with each other. These markets aren’t very interesting to regular individual investors because they involve trading large volumes of shares at once.
 By clicking “Accept”, you agree to the storing of cookies on your device to enhance site navigation, analyze site usage, and assist in our marketing efforts. View more
Cookies settings
Accept
Privacy & Cookie policy
Privacy & Cookies policy
Cookie name Active

Cookie Policy for Coinborne

This is the Cookie Policy for Coinborne, accessible from www.coinborne.com What Are Cookies As is common practice with almost all professional websites this site uses cookies, which are tiny files that are downloaded to your computer, to improve your experience. This page describes what information they gather, how we use it and why we sometimes need to store these cookies. We will also share how you can prevent these cookies from being stored however this may downgrade or 'break' certain elements of the sites functionality. How We Use Cookies We use cookies for a variety of reasons detailed below. Unfortunately in most cases there are no industry standard options for disabling cookies without completely disabling the functionality and features they add to this site. It is recommended that you leave on all cookies if you are not sure whether you need them or not in case they are used to provide a service that you use. Disabling Cookies You can prevent the setting of cookies by adjusting the settings on your browser (see your browser Help for how to do this). Be aware that disabling cookies will affect the functionality of this and many other websites that you visit. Disabling cookies will usually result in also disabling certain functionality and features of the this site. Therefore it is recommended that you do not disable cookies. This Cookies Policy was created with the help of the Cookies Policy Generator. The Cookies We Set
  • Email newsletters related cookiesThis site offers newsletter or email subscription services and cookies may be used to remember if you are already registered and whether to show certain notifications which might only be valid to subscribed/unsubscribed users.
  • Forms related cookiesWhen you submit data to through a form such as those found on contact pages or comment forms cookies may be set to remember your user details for future correspondence.
  • Site preferences cookiesIn order to provide you with a great experience on this site we provide the functionality to set your preferences for how this site runs when you use it. In order to remember your preferences we need to set cookies so that this information can be called whenever you interact with a page is affected by your preferences.
Third Party Cookies In some special cases we also use cookies provided by trusted third parties. The following section details which third party cookies you might encounter through this site.
  • This site uses Google Analytics which is one of the most widespread and trusted analytics solution on the web for helping us to understand how you use the site and ways that we can improve your experience. These cookies may track things such as how long you spend on the site and the pages that you visit so we can continue to produce engaging content.For more information on Google Analytics cookies, see the official Google Analytics page.
  • Third party analytics are used to track and measure usage of this site so that we can continue to produce engaging content. These cookies may track things such as how long you spend on the site or pages you visit which helps us to understand how we can improve the site for you.
  • From time to time we test new features and make subtle changes to the way that the site is delivered. When we are still testing new features these cookies may be used to ensure that you receive a consistent experience whilst on the site whilst ensuring we understand which optimisations our users appreciate the most.
  • As we sell products it's important for us to understand statistics about how many of the visitors to our site actually make a purchase and as such this is the kind of data that these cookies will track. This is important to you as it means that we can accurately make business predictions that allow us to monitor our advertising and product costs to ensure the best possible price.
  • The Google AdSense service we use to serve advertising uses a DoubleClick cookie to serve more relevant ads across the web and limit the number of times that a given ad is shown to you.For more information on Google AdSense see the official Google AdSense privacy FAQ.
  • We use adverts to offset the costs of running this site and provide funding for further development. The behavioural advertising cookies used by this site are designed to ensure that we provide you with the most relevant adverts where possible by anonymously tracking your interests and presenting similar things that may be of interest.
  • Several partners advertise on our behalf and affiliate tracking cookies simply allow us to see if our customers have come to the site through one of our partner sites so that we can credit them appropriately and where applicable allow our affiliate partners to provide any bonus that they may provide you for making a purchase.
More Information Hopefully that has clarified things for you and as was previously mentioned if there is something that you aren't sure whether you need or not it's usually safer to leave cookies enabled in case it does interact with one of the features you use on our site. For more general information on cookies, please read the Cookies Policy article. However if you are still looking for more information then you can contact us through one of our preferred contact methods:
  • Email: hello@coinborne.com
Save settings