Financial markets are essential for the smooth functioning of an economy, providing businesses with capital and investors with opportunities to grow their wealth. The financial market is divided into two main segments: the primary market and the secondary market. Both play crucial roles but differ in their purpose, participants, and mechanisms.
Primary Market
The primary market is where securities (such as stocks and bonds) are issued for the first time. Companies raise capital by selling new securities directly to investors. This process is known as an Initial Public Offering (IPO) for stocks or a bond issuance for debt securities.
Characteristics of the Primary Market
- New Securities: Only new securities are issued in this market.
- Direct Purchase from Issuer: Investors buy securities directly from the company or government issuing them.
- Capital Formation: The funds raised go directly to the issuing entity for business expansion, debt repayment, or other financial needs.
- One-Time Transaction: Once the securities are sold, they move to the secondary market for further trading.
Examples of the Primary Market
- A company launching an IPO, such as Facebook’s IPO in 2012, where it issued shares to the public for the first time.
- A government issuing bonds to finance infrastructure projects.
Secondary Market
The secondary market is where previously issued securities are bought and sold among investors. The issuing company does not receive any proceeds from these transactions. Instead, investors trade securities among themselves through stock exchanges or over-the-counter (OTC) markets.
Characteristics of the Secondary Market
- Trading of Existing Securities: Investors buy and sell securities that were issued in the primary market.
- No Direct Involvement of Issuer: The issuing company does not participate in these transactions.
- Liquidity and Price Discovery: Provides investors with the ability to buy or sell securities at market-driven prices.
- Continuous Trading: Securities can be traded multiple times, ensuring liquidity for investors.
Examples of the Secondary Market
- Buying and selling stocks on exchanges like the New York Stock Exchange (NYSE) or Dhaka Stock Exchange (DSE).
- Trading government bonds on the bond market.
Key Differences Between Primary and Secondary Markets
| Feature | Primary Market | Secondary Market |
| Nature | Issuance of new securities | Trading of existing securities |
| Participants | Companies, government, institutional investors | Individual and institutional investors |
| Transaction Type | Direct sale from issuer |
Investor-to-investor trading |
| Price Determination | Fixed by the issuer | Market-driven (supply and demand) |
| Objective | Raising capital for the company | Providing liquidity and investment opportunities |
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