The capital market is essentially a financial market where the debt and equity shares are purchased and sold by the investors. The market is further divided into two different parts, which are:
- Primary Market
- Secondary Market
What is Primary Market?
It is a marketplace where the investors purchase the shares directly from the company. The prices of the securities generally remain fixed. The securities can be issued through a public issue or the private placement. Now, there is a point of difference between the two terms. According to the guidelines issued by the Securities and Exchange Board of India (SEBI), if the shares are being allocated by the company to the 50 investors or more, then it is known as the public issue. On the other hand, if the securities are issued to less than 50 investors, then the issue is known as the private placement. After the capital is raised by the company, then in the next process, it gets listed on the stock exchange where the shares are being traded. It is also known as the New Issue Market (NIM).
What is Secondary Market?
It is basically a marketplace where the investors and traders carry out trade in the securities. This process is carried out after the completion of the Initial Public Offer (IPO) and the shares are being sold in the primary market. In simple terms, it is essentially a platform to trade the listed equities. The prices of the securities being offered in the secondary market tend to vary that largely depends upon the demand and supply of the securities. The Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) are the secondary market. The secondary market mainly comprises of the equity and debt markets. Here, when the securities are being sold from one investor to another investor, then risk or reward being associated with the underlying stock is also transferred. It is also known as the After Issue Market (AIM).
Difference Between Primary Market and Secondary Market
The prominent points of difference between the primary and secondary market are as follows:
- Participants: Underwriters, financial institutions, mutual funds, etc are the participants of the primary market whereas the stockbrokers who are members of the stock exchange are the main participants of the secondary market. There is no restriction on the primary market participants to buy or sell in the secondary market.
- Number of Times Securities Can be Sold: In the primary market, the securities can be sold only one time. On the other hand, in the secondary market, the securities can be sold multiple times.
- Buying and Selling Shares: Here the buying and selling of the securities is carried out between the company and investors. In the secondary market, the buying and selling process is done mutually between the investors.
- Intermediary: The underwriters or investment banks are intermediaries in the primary market and the brokers play the role of the intermediaries in the secondary market.
- Share Price: The prices of the shares are fixed at par value in the primary market whereas it keeps on fluctuating in the secondary market according to the demand and supply in the market.
If you are purchasing the shares from the primary market, then the company gets the fresh capital. As an informed investor, it is imperative that you must know about plan regarding the usage of funds by the company. If you are purchasing securities from the secondary market, then it is important to note that the company won’t be able to get the fresh funds because the exchange of securities is done between the two investors only.