Primary Market vs Secondary Market Explained
Introduction
The stock market is broadly divided into two segments: the Primary Market and the Secondary Market. Understanding the difference between these two is essential for anyone participating in IPOs or stock trading.
What Is the Primary Market?
The Primary Market is where new securities are created and offered to investors for the first time. This is the market through which companies raise fresh capital.
Examples of primary market instruments include IPOs, FPOs, rights issues, and preferential allotments.
How the Primary Market Works
- Company decides to raise capital from the public
- Offer documents are filed with SEBI and stock exchanges
- Investors apply for shares during the issue period
- Shares are allotted and credited to investors’ demat accounts
- Company receives funds from investors
What Is the Secondary Market?
The Secondary Market is where existing securities are bought and sold between investors after they have been issued in the primary market.
This includes trading on stock exchanges such as NSE and BSE.
How the Secondary Market Works
- Investors place buy and sell orders through brokers
- Orders are matched on the stock exchange
- Trades are settled and shares are transferred between demat accounts
- Company does not receive money from these transactions
Key Differences Between Primary and Secondary Market
- Purpose: Primary market raises capital for companies, while secondary market provides liquidity to investors.
- Securities: New securities are issued in the primary market; existing securities are traded in the secondary market.
- Participants: Investors deal directly with the issuer in the primary market, and with other investors in the secondary market.
- Pricing: Prices are fixed or discovered through book building in the primary market, and determined by market forces in the secondary market.
Investor Perspective
For investors, the primary market offers early access to shares, while the secondary market offers liquidity and continuous price discovery.
Regulatory Framework
Both markets operate under the oversight of SEBI and stock exchanges to ensure transparency, fairness, and investor protection.
Summary
In summary:
- Primary Market: Creation and first sale of securities to raise capital
- Secondary Market: Trading of already issued securities among investors