Difference between Primary Market and Secondary Market

Difference Between Primary Market and Secondary Market

Primary Market (New Issue Market)

Primary market which is also called new issue market represents a market where new securities i.e. shares, debentures and bonds that have never been previously issued are offered. It is a market of fresh capital. The primary market is the entry market for companies and investors, where a company or institution that requires initial or additional capital sells its shares or financial instrument to the investors. For example, Initial Public Offering (IPO), public offer, rights issue and bond issue are done on the primary market. The primary market is also unique that the initial buyer is the only person who can exchange the securities for funds. When companies are willing to go for publicly listed on the stock exchange and wants to collect funds from general investors, they first sell their financial instrument in the primary market. Primary market is the first place for trading financial instruments including stocks and bonds.

Secondary market or stock exchange

Secondary market also called stock exchange represents a market where existing securities i.e. shares and debentures are traded. Its main function is to create a link between the buyers and sellers of securities so that investments can change hands in the quickest and cheapest manner.

According to Securities Contract (Regulation) Act, 1956, the term stock exchange has been defined as, “an association, organisation or body of individuals, whether incorporated or not, established for the purpose of assisting, regulating and controlling business in buying, selling and dealing in securities.”

Thus, a stock market is a market where dealings in the listed securities are made by the members of the exchange on their own behalf or on behalf of others.

Difference between Primary Market and Secondary Market

From the above explanation it is clear that there are some differences between primary and secondary market which are given below:

Basis Primary Market Secondary Market
1. Meaning It is the market where the securities are issued for the first time. It is also referred as New issue market. It is the market where the existing securities are traded. It is also called stock Exchange.
2. Price determination The prices of the securities are determined by the company. The prices of the securities are determined by the forces of demand and supply of the securities.
3. Buying and selling Here, only buying of the securities take place. Here, buying and selling of the securities, both take place.
4. Participants  Securities are sold by the company directly to the investors. Securities are traded by the investors. Company is not involved in trading.
5. Purpose Purpose of primary market is to provide capital for setting new business. The main purpose of secondary market is to provide liquidity to the investors.
6. Capital formation Primary market promotes capital formation directly. Secondary market promotes capital formation indirectly.
7. Particular place Primary market has no particular place but the activity of bringing in new issues is called the primary market. Secondary market has a particular place which is called stock exchange.