What are the differences between primary market and secondary market?

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What are the differences between primary market and secondary market?
We all know that market is a place where buyers and sellers meet and carry out transaction. In a market, the selling price and the cost price are fixed owing to the demand and supply. However, apart from the very basic concept we need to know deeper about market as it is evolving and growing big day by day.

Capital market generally consist of primary market and secondary market. Primary and secondary market are distinct terms and different from each other.

Primary Market: Primary market considered to be very important as it the place where securities are offered to the public for the first time. So, it is the place where securities are made.

It may happen that a company may need capital for its business. Then the company approaches the primary market and issue shares in an IPO (Initial Public Offering).

Investors buy the company's share and start sharing risk and returns of the company from then onwards. The company thus gets the capital it required to carry on investments.

After the capital is raised by the company , it gets listed on the stock exchange where the stocks can be traded. The shares are now traded in secondary market.

Secondary market: Secondary market is the place where the shares are traded after their initial offering in the primary market. Therefore, the stock market is considered as secondary market. Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) are secondary market.

Here, the investors trade among themselves without the involvement of the issuing company. Typically, in primary market prices are set beforehand by the issuing company. But in secondary market prices are not set rather they depend on the forces of demand and supply of the securities.

Maximum trading is done in the secondary market. However, trading in the secondary market does not have any effect on the capital structure of the company. The primary market gives the company an opportunity to increase capital they want to invest.

Click here to read Money Market and Types of Money Market Instruments

Conclusion

Primary as well as secondary market is regulated by Securities and Exchange Board of India (SEBI). Recently SEBI has announced reforms to primary market. According to the regulation, companies with market valuation of less than Rs.4,000 crore can sell 25% or Rs.400 crore, whichever is lower in an IPO.

This move will encourage the companies to raise capital in the primary market. Increased activity in the primary market thus rises corporate investment which in turn boosts economic growth.

GoodReturns.in

Story first published: Thursday, June 26, 2014, 11:53 [IST]
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