Meaning of Primary and Secondary Market
The primary market is where companies sell new shares to the public to collect funds for business expansion or acquiring another company. This market helps attract savings and contributes to economic growth. Some common types of issues in the primary market include Offer for Sale, Public Issue, Bonus Issue, and Right Issue.
The secondary market is where investors trade existing securities such as shares, bonds, and other financial instruments. In the secondary market, these trades happen either on stock exchanges or directly between buyers and sellers, like over-the-counter (OTC) markets.
In conclusion, both the primary market and the secondary market serve important purposes. The primary market is where new shares are first issued, while the secondary market is where these shares are bought and sold after their initial issuance.
Difference Between Primary Market and Secondary Market
Primary Market and Secondary Market Examples
Primary Market Examples:
Initial Public Offering (IPO): A company like Zomato or Paytm issues new shares to the public for the first time to raise capital for growth. This is a typical example of a primary market transaction.
Right Issue: A company provides extra shares to its existing shareholders at a reduced price. For instance, Reliance Industries could issue additional shares to current investors to secure funding for a new project.
Bonus Issue: A company distributes free shares to its current shareholders based on the number of shares they already own. For example, Tata Motors may offer bonus shares as a way to reward its investors.
Secondary Market Examples:
Stock Exchanges: The Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) are examples of secondary markets where investors buy and sell shares of companies like Infosys, Tata Motors, or HDFC Bank.
Bond Markets: Investors buying and selling government or corporate bonds in markets like the NSE Bond Market or OTC (over-the-counter) bond market are examples of secondary market activities.
ETFs (Exchange-Traded Funds): Investors trade ETFs on the secondary market, like the Nifty 50 ETF, where they buy and sell based on the price determined by supply and demand.
Functions of Primary Market and Secondary Market
Primary Market Functions:
Raising Money: Helps companies get funds by selling new shares or bonds.
Setting Prices: Decides the price of shares and bonds.
Helping Growth: Supports business expansion and economic growth.
Investment Opportunities: Allows people to buy new shares directly from companies.
Providing Funds: Makes it easier for businesses to raise money.
Secondary Market Functions:
Easy Buying and Selling: This lets investors buy and sell shares and bonds.
Setting Prices: Prices are based on supply and demand.
Helping Investment: Provides a place for trading investments.
Spreading Risk: Offers different investment options to reduce risk.
Market Efficiency: Keeps the financial system running smoothly.
Conclusion
Both the primary and secondary markets play crucial roles in the financial system. The primary market helps companies raise funds by issuing new shares or bonds, while the secondary market allows investors to buy and sell those securities. The primary market focuses on raising money for business growth, while the secondary market provides liquidity and opportunities for trading investments. Understanding these markets is essential for investors and businesses alike to navigate the world of finance effectively.
FAQs on Primary Market and Secondary Market
1. What is Primary Market and Secondary Market
The primary market is where companies sell new shares or bonds to raise money for things like expansion. Investors buy directly from the company. The secondary market is where investors buy and sell shares or bonds that have already been issued. This happens on stock exchanges like the NSE or BSE.
2. How do companies raise money in the primary market?
Companies raise money by issuing new shares or bonds that investors buy directly from them.
3. What is an IPO?
An Initial Public Offering (IPO) is when a company first sells shares to the public through the primary market.
4. Can I buy shares in the primary market?
Yes, investors can buy shares directly from the company when it issues new shares, usually through an IPO or rights issue.
5. Who buys and sells securities in the secondary market?
Investors buy and sell securities between themselves in the secondary market, not involving the company.
6. What happens to the money raised in the primary market?
The money raised in the primary market goes to the company to fund its projects, expansion, or other business needs.
7. What types of securities are traded in the secondary market?
In the secondary market, investors trade stocks, bonds, options, and other financial securities.
8. Are prices fixed in the primary market?
Yes, prices are set by the company when it issues new securities in the primary market.
9. Do prices change in the secondary market?
Yes, prices in the secondary market change based on supply and demand among investors.
10. What is a right issue?
A right issue is when a company offers more shares to its existing shareholders at a discounted price in the primary market.
