The Indian stock market can be sub-categorized into three types - primary market, secondary market, and tertiary market. Out of these three sub-categories, the primary and the secondary markets are often the most talked about since these are the two markets that hold a lot of significance to retail investors.
Therefore, in this article, we’re going to take a look at both of these markets, including the difference between primary and secondary markets. Let’s begin.
The primary market is a subsect of the stock market where companies sell their shares and other securities directly to the larger public via an Initial Public Offering (IPO) or a New Fund Offer (NFO). In the primary market, the shares are transferred from the company to the investor.
The secondary market is a subsect of the stock market where the shares of a company are freely bought and sold between investors. The issuing entity does not feature in the secondary market, and all exchanges of shares happen only between investors through a stock exchange such as the National Stock Exchange (NSE) or the Bombay Stock Exchange (BSE).
Now that you’re aware of what the primary and secondary markets are, let’s take a quick look at a few of the differences between them.
A company desirous of issuing securities for the first time can only do it through the primary market. Also, the sale of securities happens only once - from the company to the initial investor.
In the secondary market, however, there’s no issue of securities. Rather, the already-issued securities of a company are traded by investors through a stock exchange. So here, the sale of securities doesn’t just happen once but is a continuous process instead.
One of the major sources of funding for a company is the primary market. Here’s how. Since it is the issuing company that sells securities to investors in the primary market, the money that it receives by doing so goes directly to it. The proceeds from the sale of securities in the primary market are often used by the issuing company to further its business objectives. The issue of securities in the primary market is an easy and hassle-free way for companies to raise money.
In the case of the secondary market, since it is an investor selling the securities of a company they own, the proceeds from such a sale go to the selling investor. The company does not receive any part of the proceeds from a sale made in the secondary market.
A major difference between primary and secondary markets is the pricing of securities. In the primary market, the price of a security is usually fixed. The underwriters and lead book-running managers of an IPO or NFO are the entities that determine the price at which the security is to be sold to the public.
In the secondary market, however, the price of security tends to fluctuate depending on the buying and selling patterns of investors. This is because the price discovery mechanism in the market happens automatically based on the forces of demand and supply and is not controlled by the company or any other entity.
There are many intermediaries involved in the primary market. This includes the book-running lead managers, stock exchanges, merchant bankers, and registrars, among others. All of these intermediaries work together to make an Initial Public Offering or a New Fund Offer of a company or a fund house a reality.
In the case of the secondary market, there are only two intermediaries involved, and they are the stockbroker and the stock exchange. The stockbroker provides the platform for an investor to buy or sell securities, whereas the stock exchange acts as the platform that links two investors and their respective stockbrokers together.
Another major difference between the primary market and the secondary market is the level of involvement of authorities like the Securities and Exchange Board of India (SEBI). A company desirous of issuing its shares to the public via the primary market has to work closely with the SEBI and can only proceed with the issue after the watchdog accords its approval.
In the secondary market, however, the SEBI doesn’t actively involve itself in day-to-day affairs. Instead, the watchdog only intervenes in the event of a major mishap, price manipulation, or other extraordinary circumstances.
So, there you have it. The difference between the primary and the secondary markets. If you’re an investor who is planning on investing in upcoming IPOs, the primary market is where you need to head to. On the other hand, if you’re interested in investing in the stocks of companies that are already listed on a stock exchange, the secondary market is where you need to be.
That said, irrespective of your preference, investing in the primary market or the secondary market requires you to have an active trading and demat account. So visit Motilal Oswal’s website today to open a Demat account and a trading account for free and begin your wealth creation journey.