Primary and Secondary Markets
Primary and Secondary Markets
Primary Market
Definition: A financial market where new issues of stocks are sold to initial buyers.
Example: Initial Public Offering (IPO).
Function: Facilitates new financing to corporations.
Secondary Market
Definition: A market where previously issued securities are resold.
Importance:
Most trading of securities occurs in the secondary market.
It serves two main functions:
Liquidity:
Makes financial securities more liquid, meaning they are easier to buy or sell.
Increased liquidity makes securities more attractive to investors, facilitating sales in the primary market.
Price Setting:
Determines the price of the securities that firms sell in the primary market.
Prices of securities offered in the primary market are influenced by prices in the secondary market.
Concept Check Activity
Primary Market vs. Secondary Market
Feature | Primary Market | Secondary Market |
|---|---|---|
Type of securities | For n_______ issued financial securities | For r_______ of issued financial securities |
Capital raised | Facilitate new financing | No new capital |
Liquidity | Less liquid | More liquid |
Trading | Facilitate most of the securities trading | Investors sell the securities among themselves |
Examples | e.g., IPO, Right issue | - |
Important Functions of Secondary Markets
Increase Liquidity:
Makes financial securities more marketable.
Investors prefer a more liquid (secondary) market, which helps firms in selling securities in the primary market.
Price Setting:
Securities’ prices traded in the secondary market influence prices of new issues in the primary market.