Primary vs Secondary Capital Market
Capital market refers to any part of the financial system that raises capital from bonds, shares, and other investments. New stocks and bonds are created and sold to investors in the primary capital market, while investors trade securities on the secondary capital market.
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Primary Capital Market:
- Issue IPO: When a company publicly sells new stocks and bonds for the first time, the new issue takes the form of an initial public offering (IPO). When investors buy securities on the primary capital market, an underwriting firm is hired by the company that offers the securities to review it and create a prospectus outlining the price of the securities to be issued and other details.
- Regulation: All issues on the primary market are subject to strict regulation. Companies are required to file statements with the Securities and Exchange Commission (SEC) and other securities agencies and have to wait for approval of their filings before they can go public.
- Investment Bankers: Companies that issue securities through the primary capital market may hire investment bankers to obtain commitments from large institutional investors to purchase the securities when first offered.
- Roadshows: Marketing the sale to investors can often include a roadshow in which investment bankers and the company’s leadership travel to meet with potential investors and convince them Of the value of the issuing security.
- Low Price IPO: Prices are often volatile in the primary market because demand is often hard to predict when security is first issued. For this reason, many IPOs are set at low prices.
- Pro-rated rights: A company can raise more equity in the primary market after entering the secondary market through a rights offering. The company will offer pro-rated rights based on share investors already own.
- Private placement: where a company may sell directly to a large investor, such as a hedge fund or a bank. The shares in this case will not be made public.
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Secondary Capital Market:
- The Stock Market: The secondary market is where securities are traded after the company has sold its offering on the primary market. It is also termed the stock market. The National Stock Exchange (NSE), Bombay Stock Exchange (BSE), New York Stock Exchange (NYSE), London Stock Exchange, and Nasdaq are secondary markets.
- Shares Availability: Small investors have a much better chance of trading securities on the secondary market since they are excluded from IPOs. In the secondary market, anyone can buy securities as long as they are willing to pay the asking price per share.
- Brokerage: A broker typically purchases the securities on behalf of an investor in the secondary market. Unlike the primary market, where the prices are set prior to an IPO, secondary market prices fluctuate with demand. Investors would also be expected to pay the broker a fee for performing the exchange.
- Volume: The volume of securities traded varies from day to day, as supply and demand for the security fluctuate. This also has a major impact on the price of the security.
Author: Kinjal Chheda