Decoded: Primary and secondary markets in a nutshell

The primary market provides companies a platform to float their Initial Public Offerings or IPOs and raise capital. The involvement of companies ends with the primary market. And in the secondary market, the shares allotted in the primary market are traded. Just think of a situation where there was no secondary market and people had to track down the shareholders to buy or sell a stock. So, the secondary market works as platform which brings together all the sellers and buyers of stocks.

What is a primary market?
Primary market refers to a market place where shares or securities are first offered by the issuer or company to the general public. It is also known as the IPO market. Companies tap the primary market to list at the bourses and raise funds. This fund can be used to pay the company’s debt obligation, expand capacity, or provide an exit to some of the existing stakeholders. A company has to meet a set of financial and regulatory criteria before making a debut in the primary market.

What is a secondary market?
Secondary market refers to the open stock market, a place where investors can buy and sell shares at prevailing prices. Also, shares of companies that are issued through the primary market are then available for buying and selling in the secondary market, once the listing process is completed.

For example, a company, let us call it ABC, wants their shares to be listed on the stock exchanges. So it will float an IPO in the Primary market. Over there, after the IPO is closed, shares will be allotted to successful bidders. And after the share allotment, these stocks will be listed and available for trading in the secondary market. So investors can now buy and sell shares anytime during market hours.

Well, the fact is, both these markets are not comparable as they play a diverse role. Primary market is the gateway for companies desirous to list their shares in the secondary market. And in the secondary markets, like Bombay Stock Exchange (BSE) or New York Stock Exchange (NYSE), investors trade in previously issued securities.

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