Difference between Primary Market and Secondary Market | Investing in Stock Market

Difference between Primary Market and Secondary Market
Investing in Stock Market Notes

difference between primary market and secondary market

Primary 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 main function of this market is to facilitate the transfer of funds from willing investors to the entrepreneurs who need funds. but with the changing time, the nature of primary market is also changing. There exist two types of primary market:

a)      Market where firms issue securities for the first time through Initial Public Offer (IPO).

b)      Market where firms which are already trading in secondary market raise additional capital through Seasoned Equity Offering (SEO).   

Secondary Market

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.

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.

Capital market promotes capital formation indirectly.