Difference between Primary Market and Secondary Market
A market that serves as a link between the savers and borrowers by transferring the capital or money from those who have a surplus amount of money to those who are in need of money or investment is known as Financial Market. In general, the investors are known as the surplus units and business enterprises are known as the deficit units. Hence, a financial market acts as a link between surplus units and deficit units and brings the borrowers and lenders together. The four basic functions of a financial market are the facilitation of price discovery, mobilisation of savings and channelising them into the most productive use, provision of liquidity to financial assets, and reduction of cost of the transaction. Financial Markets are of two types; namely, Capital Market and Money Market.
Capital Market
A marketer including all institutions, organisations, and instruments providing medium and long-term funds is known as a Capital Market. A capital market does not include institutions and instruments providing finance for a short term; i.e., up to one year. Some of the common instruments of a capital market are debentures, shares, bonds, public deposits, mutual funds, etc. A capital market is of two types; namely, Primary Market and Secondary Market.
Primary Market
A market in which the securities are sold for the first time is known as a Primary Market. It means that under the primary market, new securities are issued from the company. Another name for the primary market is New Issue Market. This market contributes directly to the capital formation of a company, as the company directly goes to investors and uses the funds for investment in machines, land, building, equipment, etc.
Secondary Market
A market in which the sale and purchase of newly issued securities and second-hand securities are made is known as a Secondary Market. In this market, a company does not directly issue its securities to the investors. Instead, the existing investors of the company sell the securities to other investors. The investor who wants to sell the securities and the one who wants to purchase meet each other in the secondary market and exchange the securities for cash with the help of an intermediary, a broker, is done.
Difference between Primary Market and Secondary Market
| Basis | Primary Market | Secondary Market |
|---|---|---|
| Meaning | A market in which the securities are sold for the first time is known as a Primary Market. | A market in which the sale and purchase of newly issued securities and second-hand securities are made is known as a Secondary Market. |
| Types of Securities | In the primary market, the sale of new securities takes place. | In the secondary market, the sale and purchase of existing or second-hand securities take place. |
| Issued by | In the primary market, the securities are directly issued by companies. | In the secondary market, the securities are transferred between the investors only. |
| Capital Formation | A primary market directly contributes to the capital of a company as it involves the transfer of funds from surplus units to deficit units. | A secondary market indirectly contributes to the capital of a company as it involves an exchange of funds between surplus units only. |
| Entry | The companies enter a primary market for raising capital for their operations. | The securities of listed companies only are bought and sold in this market. |
| Geographical Location | There is no fixed geographical location of a primary market. Every bank, institution, foreign investor, etc., contribute to this market. | There is a fixed geographical location of a secondary market and it also has fixed working hours. |
| Price | The price of securities in a primary market is fixed by the management of the company issuing them. | The price of securities in a secondary market is fixed by the demand and supply of the stock exchange market. |
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