Investments · March 31, 2022

What Is The Difference Between Primary Market And Secondary Market

Introduction

The markets in which the securities are generally traded are majorly divided into two segments: The primary market & the secondary market. Each of these market segment are equally important in smooth transfer of equity from one investor to another.

What is primary market

The primary market is a place where equities and securities are originally purchased or offered for sale. Thus, the proceeds from the sale of these securities are paid directly to the company’s promoters.

The primary market is where securities are created. Indeed, the company offers new stocks and bonds to the public for the first time in this market.

The most classic example of a primary market is IPO (Initial Public Offering). An IPO is a process where the stock equities are available to the general public for the first time.

Take for example, Company A wants to raise a capital of Rs. 50 crores from the public of the country. In exchange of the money, the company is ready to offer 10% of their holding. Thus, the issue will be raised to pool money from the investor through a process called Initial Public Offering (IPO). In this scenario, the investors can study the fundamentals of the company and decide if they want to apply for IPO or not. Thus, the Rs. 50 Crore will get raised and the 10% of the company will get proportionately distributed. This is a scenario of a primary market

Also Read: How Does An IPO Bidding Process Actually Work

What are secondary markets

Secondary markets are places where different stake holders dispose / acquire their equities at any particular point in time. A classic example of a secondary market is the stock exchange.

As continued from the above example:

When the Company A shares are distributed to investors, they needed a way to sell or acquire them when they desired to. As a result, a secondary market, specifically a stock exchange was established to allow investors to purchase and sell their securities as needed.

Here are the 5 difference between primary market and secondary market

Objectives of the market

The objective of a primary market is to raise capital to the promoters. This money that get collected in exchange of equity get directly used to the well being of the business activities. This is a first time when a company goes public. This means that the public of the country become the shareholders of the business.

The objective of the secondary market is to create liquidity for the equities and make it possible for investor to sell and buy equities after the IPO process. There is a need for investors to buy securities or sell them as and when they require.

Since it is absolutely difficult for a person physically and buy / sell equity in physical form, a secondary market was the need of the hour.

Utilization of funds

The funds collected from primary market are used in the growth and development of the business. Thus, the major utilization of funds gets in the running operations and growth directly.

On the other hand, secondary markets are a place where a value is generated . The current shareholders can either buy more equity than they currently own or sell off their security in the secondary markets. A stock market is a classic example of a secondary market.

Control on valuation

The investor does not have any direct control on the value of the equity available for sale in the primary markers. The investors have no choice but to apply the said stock at the pre defined valuation.

On the other hand, while investing in a secondary market, the investor has a control to time the market and make their suitable entry / exit points.

Secondary markets are for value creation and capital appreciation. For short term the prices might act volatile and absurd. However in the long term, the prices will reflect the true fundamentals of the company.

Risk in investment

Investing through a primary market is far less risky. This is because, when an IPO is issued and investors apply for the IPO, there is a value of chance that the desired investor will receive the applied IPO or not.

When the IPO of the company does not get issued to the investor, all the money then gets refunded back. Thus, having a lower chance of loosing money.

The risk potential for investing in a secondary market is comparatively higher. There are equal chances for the stock to trader in positive or negative. Thus, one need to do thorough research.

The investment risk is manageable in both cases. This is possible by thoroughly understanding the fundamentals of the company. Thus, One way to identify the fundamentals is to understand the intrinsic value of the company. If one invests in a stock at its true value, one substantially reduces the risk on investment.

Also Read: What Is The Difference Between Intrinsic Value And Market Value

Capital required

When beginning the investment in a primary market, one needs to have a minimum investment in order to participate. For example, the minimum investment for investing in primary market in India is Rs. 15,000/- and in its multiples. This may create an entry barrier for quite a few retail investor.

While, investing in secondary markets do not come with any entry barrier of minimum investment. One can even purchase only one stock of the company. Thus, allowing investors to make their investment flexible without concerning the minimum investment criteria.

Conclusion

Summary table

Primary marketSecondary market
The objective is to raise money for the businessThe objective is to create liquidity
The money gets directly invested in the business of the companySecondary markets enable in capital appreciation
The investors do not have direct control on equity valuationThe investors can time the market and make suitable entry / exits
Lower riskHigher risk
Requires higher capital to participateRequires minimal investment.
Difference between Primary market and Secondary market
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