As we know that capital markets which is part of financial markets, is divided in securities and non-securities markets. Primary and secondary securities market are the two parts of securities market. In this blog, I’m going to explain the primary and secondary Securities market in detail.
What do securities mean?
For layman’s terms, securities are financial instruments or certificates which have monetary value and can be traded in market. Generally, there are three types of securities
1.Equity –stocks
2.Debt-bonds and debentures
3.Derivatives- futures, option, and swaps
Simply, equity securities include stocks; whereas, debt securities covers bonds, debentures. Debentures are the rights of ownership like options, futures and swaps.
a) When an investor purchase equities, the person hold ownership in the company or corporations and receives dividends in return.
b) On the other hand, person is a debitor when he or she purchases bonds of a company or corporations and he or she receives fixed interest in return over the original amount.
c) In case of derivative securities, person got the right of ownership in that corporations or company.
What do securities market mean?
As I mentioned earlier that securities are the financial instruments that have monetary value and can be traded in market. There are two types of securities newly issued or already issued or old existing securities.
For clarity, primary Securities market is a market where newly issued securities are bought and sold.
Whereas, secondary securities market is a market where existing or old securities are bought and sold by traders.
Both primary and secondary securities market are known to trade securities that are either newly issued or already issued. These can be done either by exchanges or over the counter directly.
A.Instruments of primary Securities market
Following are the instruments of the primary Securities market.
1.IPOs (initial public offering),
2.Book building,
3.Private placement are included in the primary Securities market.
A.Initial public offering (IPOs)
When a private company sells its shares in public first time to raise capital and convert it into public company, it is done by the initial public offering. Company owner sells its ownership in public and paves the way for transition from private to public company.
It is often done by original investors to realize full potential of theirs investment by raising capital from public. IPOs are issued only after the fulfilling the requirements and conditions set by stock exchanges and Securities and exchange boards.
B.Book building and primary market
Book building is a process of finding par price of the share a private company is going to issue in market as IPOs. This process is done by the professionals who are expert in the evaluating the value of company stocks. Such person or entities are known as underwriter.
C.Private placement
Third, private placement is an alternative means to sale the stocks of company to pre-determined investors instead of direct in public.
If the company doesn’t want to face the unnecessary regulatory barriers, and wants to sale selected investors including big investors, mutual funds and other banks to raise funds to realize full potential of theirs investment.
B.Secondary securities market
When a private company decides to sells its ownership in the form of shares directly to the public including individual investors, retailers, banks, institutions etc. it is called initial public offering (IPOs).
And, this done in the primary Securities market. But, when a trader buys and sells shares of company he owned on the stock market to other traders without involvement of owner of the company, it is termed as the secondary securities market.
Primary vs secondary securities market
For more clarity, primary Securities market is a market where owner of a company issues fresh stock of shares in the public to raise funds for business activities.
IPOs, book building, and private placement are the major constituents of primary market.
On the other hand, if the pre owned stocks of company hold by a trader sold or bought in the market on stock market to other traders, is called secondary securities market.
Stock markets like Nasdaq, New York stock exchange, Nikki, Nifty 50, etc. are the examples of stock market indexes in the world.
Understanding secondary securities market
Unlike primary Securities market where prices for newly issued shares are decided after considering various institutions, experts or underwriters, famous broking houses etc.
In secondary securities market prices of shares is decided by the demands and supply of shares hold by public. And, the performance and fundamentals of the given company.
Simply, if the performance of the given company is better over the years, the demand for shares of the company rises and consequently, prices of the shares.
In primary Securities market, owner intitiates the process of transition of private to public after thoroughly evaluation. In secondary securities market, ownership is transferred from one trader to another by stock exchanges.
Shares sold by the process of initial public offering IPOs to public in primary market, trader later resells in the secondary securities market to other traders without involvement of owner.
Last words on primary and secondary securities market,
Nowadays, in the rapidly economiclly integrating world, across the world, pre-owned shares, bonds, derivatives are intensively bought and sold by large numbers of traders.
Undoubtedly, this is a better means for owners to raise funds from public for business expansion and realize full potential of theirs capital and expertise.
At the same time, for general public, it is a great opportunity to raise the value of theirs capital by becoming a owner of the company he or she purchases shares from secondary market.
In primary Securities market, Company owner sells its ownership in public and paves the way for transition from private to public company.
IPO or Initial Public Offering, book building, Private Placement are the major instruments of primary Securities market.
Both primary and secondary securities market are the great source of funds for the corporates, businesses, and any productive activities.
This all about the primary and secondary market of capital markets. Now, just take a look at the short summary of primary and secondary securities market.
Solved questions on primary and secondary securities market
Finally, here are some useful solved questions on the primary and secondary securities market.
Q.1. What does primary market mean?
Ans: When the owner of the privately owned company decides to sell fresh stock of shares to the public, it is done in the primary market.
In short, primary Securities market is the arrangement in which fresh stock of shares are sold and bought.
Q.2. What is mean by secondary securities market?
Ans: Pre-owned stocks of shares of companies sold and bought in the market is termed as the secondary securities market.
Simply put, it is an arrangement in which pre-owned securities are bought and sold by market participants is known as secondary securities market.
Q.3. What is the purpose of primary and secondary securities market?
Ans: Undoubtedly, constituents of capital markets-primary and secondary securities market are better means for owners to raise funds from public for business expansion and realize full potential of theirs capital and expertise.
In the today’s globalizing world, capital markets are well developed surpassing political boundaries.
Currency market and convertibility
Investing in equities and bonds
Initial public offering or IPO