Is an initial public offering an example of a primary or a secondary market transaction? explain.

Difference Between Primary Market vs Secondary Market

The primary market is where securities are created. It’s in this market that firms float new stocks and bonds to the public for the first time. An initial public offering, or IPO, is an example of a primary market. An IPO occurs when a private company issues stock to the public for the first time. The secondary market is commonly referred to as the stock market. The securities are firstly offered in the primary market to the general public for the subscription where a company receives money from the investors and the investors get the securities; thereafter they are listed on the stock exchange for the purpose of trading.

The financial market is a world where new securities are issued to the public regularly of varied financial products and services, tailored to the need of every individual from all income brackets. These financial products are bought and sold in the capital market, which is divided into the Primary Market vs Secondary Market. This is both distinct terms.

Primary Market

The primary market refers to the market where securities are created, while the secondary market is one in which they are traded among investors. Various types of issues made by the corporation are a Public issue, Offer for Sale, Right Issue, Bonus Issue, Issue of IDR, etc. The company that brings the IPO is known as the issuer, and the process is regarded as a public issue. The process includes many investment banks and underwriters through which the shares, debentures, and bonds can directly be sold to the investors.

For example, company XYZ Inc. hires four underwriting firms to determine the financial details of its IPO. The underwriters detail that the issue price of the stock will be $20. Investors can then buy the IPO at this price directly from the issuing company. This is the first opportunity that investors have to contribute capital to a company through the purchase of its stock. A company’s equity capital is comprised of the funds generated by the sale of stock on the primary market.

Secondary Market

This includes the New York Stock Exchange (NYSE), NASDAQ, and all major exchanges around the world. The defining characteristic of the secondary market is that investors trade among themselves. In this market 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.

For example, if you go to buy Amazon (AMZN) stock, you are dealing only with another investor who owns shares in Amazon. Amazon is not directly involved with the transaction.

While the primary market offers avenues for selling new securities to investors, the secondary market is the market dealing in securities that are already issued by the company. Before investing your money in financial assets like shares, debenture, commodities, etc, one should know the difference between the Primary Market and Secondary Market, to better utilize savings.

Primary Market vs Secondary Market (Infographics)

Below is the top 10 difference between Primary Market vs Secondary Market:

Key Differences Between Primary Market vs Secondary Market

Both Primary Market vs Secondary Market are popular choices in the market; let us discuss some of the major differences :

• The securities are initially issued in a market known as Primary Market, which is then listed on a recognized stock exchange for trading, which is known as a Secondary Market.
• The prices in the primary market are fixed whereas the prices vary in the secondary market depending upon the demand and supply of the traded securities.
• In the primary market, the investor can purchase shares directly from the company. In the Secondary Market, investors buy and sell the stocks and bonds among themselves.
• In the primary market, security can be sold only once, whereas in the secondary market it can be done an infinite number of times.
• In the Primary Market, the amount received from the securities is the income of the company, but in the Secondary Market, it is the income of investors.
• The primary market is rooted in a specific place and has no geographical presence as it has no organizational set up. Conversely, the Secondary market is present physically, as a stock exchange, which is situated in a particular geographical area.
• Investment bankers do securities trading in the case of the Primary Market. Conversely, brokers act as intermediaries while trading in the secondary market.

Head To Head Comparisons Between Primary market vs Secondary market

Below is the topmost Comparison between Primary Market vs Secondary Market:

Conclusion

The two financial markets play a major role in the mobilization of money in a country’s economy. Primary Market encourages direct interaction between the companies and the investor while on contrary the secondary market is where brokers help out the investors to buy and sell the stocks among other investors. In the primary market bulk purchasing of securities does not happen while the secondary market promotes bulk buying.

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