The Difference Between the Primary and Secondary Market

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The capital market is a platform where buyers and sellers trade various financial instruments such as bonds, stocks, and other securities. It is a medium for transferring capital from investors to companies that need the money to finance business ventures and investments. The term ‘capital market’ includes in-person and digital trading spaces with further classification into primary and secondary markets.

Here’s an in-depth look into the primary market vs secondary market differences and their meaning. However, it is pertinent to understand the types of securities that investors encounter in capital markets before discussing primary and secondary markets. Let us have a look at that first.

Types of securities in capital markets

Capital markets primarily deal with equities and debt securities. Both equity and debt securities are forms of investments with different risks and returns for the investor. Here’s a more detailed explanation of the two:

Equity Securities: An equity security is traded on the stock market and represents the ownership interest of shareholders in a company or business venture. Equity securities translate to shares of capital stock, including shares of common and preferred stocks. Holding equity shares of a company means owning a portion of that company, and the shareholder is entitled to the company’s future earnings.

Although equity shareholders may profit from capital gains when they sell the securities, they may not receive regular payments. However, equity shareholders get some degree of control over the company via voting rights. Moreover, they get a share of the residual interest incase of bankruptcy.

Know more about investing in equities in our article on Equity Investments: Benefits, Considerations, And Must-Know Tips on the Teji Mandi blog.

Debt Securities: Unlike equity securities, debt securities entitle the lender to receive a stream of interest payments and other contractual rights, except voting rights, while requiring the borrower to repay the principal amount borrowed too. These are IOUs in the form of bonds and notes and represent the borrowed money that must be paid back with interest. Debt securities typically have specific terms stipulating the loan size, interest rate, debt maturity, and the renewal date.

Some examples of debt securities include fixed deposits, certificates of deposits, government and corporate bonds, and collateralised securities.

Types of Capital Markets: Primary Market v/s Secondary Market

Capital market transactions take place through primary markets and secondary markets. In other words, investors can buy and sell securities in two types of markets.

Primary Market

The primary capital market is where a company sells new bonds and stocks to the public for the first time. The initial public offerings – or IPOs – take place in the primary market.

The company that issues securities hires underwriters who help them correctly price their securities, buy those securities from them (which ensures all of their stock offerings are taken up), and then further sell them using their underwriting network. Say the underwriters, also known as book-running lead managers, determine the issue price of the stock at Rs. 100. Thus, investors in a primary market can buy the shares of the IPO at Rs. 100 directly from the issuing company. Any shares that are left in the market are purchased by the underwriters, thereby transferring the risk of buying the securities onto them.

The term primary market stems from the fact that investors can first-hand contribute capital to the company by purchasing the stock.

Secondary Market

If a primary market creates securities, a secondary market is where the securities’ trading occurs. Popularly known as the stock market, the secondary market includes the BSE, NSE, NYSE, NASDAQ, and all stock exchanges around the world.

Investors trade previously issued securities in a secondary market, but these transactions do not involve the issuing company. For example, if you buy a stock of Tata Consultancy Services (TCS), you are dealing only with another investor who owns shares in TCS. However, TCS has no direct involvement in this transaction. Read more about the primary and secondary market