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Primary Market and Secondary Market: Introduction

5 Mins 27 Feb 2021 0 COMMENT

What is Primary Market?

A primary market is the market where companies and governments issue fresh securities to raise funds from investors. If you are buying a share in an IPO, you are transacting in the primary market.

What is Secondary Market?

The secondary market is the place where existing securities such as shares, bonds, treasury bills, debentures, etc. are traded between investors. If you are buying or selling a share on a stock exchange like the BSE or NSE, you are trading in the secondary market.

Features of a Primary Market

  • Securities are freshly issued through an IPO or FPO.
  • Companies and government use the primary market to raise funds.
  • Investors get to own these securities by applying for them.

Features of Secondary Market

  • Existing securities such as shares and bonds are traded between investors.
  • Price of stock fluctuates based on demand and supply.
  • Securities are traded between investors through an exchange.

Benefits of a Primary Market

  1. Many companies tend to keep valuations of their securities reasonable to attract more investors and to let the issue be fully subscribed.
  2. Investors have an opportunity to buy shares of emerging companies that are entering the market for the first time at a reasonable valuation.
  3. Many-a-times, established non-listed companies also go public, giving investors an opportunity to own shares in them.

Benefits of a Secondary Market

  1. Investors can trade shares at market-determined prices.
  2. Provides high liquidity to investors through ease of buying and selling the securities.
  3. Helps investors to invest in a variety of securities even with a small amount.

Comparing Primary and Secondary Market

Primary Market

Secondary Market

Trade takes place between investors and issuer company.

Trade takes place between investors.

Companies’ issues IPOs. Investors invest through an application process.

You can buy and sell shares on stock exchanges via your trading account.

Price of securities is fixed within a band.

Price of securities fluctuates based on demand and supply and other market related factors.