The Primary Market Defined
The primary market is where securities are created so they can be sold to investors for the first time. Above all, the primary market issues new securities on an exchange to allow companies, governments and others to raise capital.
Securities issued through a primary market can include stocks, corporate or government bonds, notes and bills. Those issuing securities can sell them to reduce debt on their balance sheets. Also, they can expand a company’s physical footprint, develop new products, or fund other business goals.
In a typical primary market transaction, there are three players. First, there’s the company issuing the new securities. Secondly, there are investors who purchase them. Finally, there’s bank or underwriting firm that oversees and facilitates the offering. The bank or underwriting firm determines the accurate value and sale price of the new security.
There are four ways investors can buy securities through the primary market:
1. Initial Public Offering (IPO)
2. Rights Issue
3. Private Placement
4. Preferential Allotment
Primary Market vs. Secondary Market
The other side of the capital market coin is the secondary market. The secondary market is where existing shares of stock, bonds and other securities are traded between investors, after they’ve been issued on the primary market. These trades happen on an exchange, such as the New York Stock Exchange or the Nasdaq.
When buying stocks on the primary market, they’re purchased directly from the issuer. With the secondary market, the issuing company doesn’t play a part. This is what you might automatically think of when you think of stock trading. Following an IPO, investors can buy or sell company shares on an exchange.
For example, you decide you want to buy 100 shares of XYZ company. You log in to your online brokerage and place an order for 100 shares. A seller who owns those shares sells them to you when the bid and ask price align. The bid price is your target price you want to pay for the shares. The ask price is the seller’s target price for selling. The bid-ask spread is the difference between the two numbers.