Primary Market and Secondary Market - Difference, Features, FAQs

The term "market" may have several diverse meanings, but it is often used as a catch-all phrase to denote the main and secondary markets. In reality, the primary market and secondary market are two independent notions; the primary market refers to the market where securities are created, while the secondary market is one in which they are traded among investors.

Meaning of Capital Market

The capital market is a vital component of the financial system that permits the purchasing and selling of long-term financial securities. These instruments include stocks, bonds, and other securities that reflect ownership or debt in public and private corporations, governments, or other organizations. The capital market offers a venue for investors, such as people, organizations, and corporations, to exchange these instruments to obtain cash for diverse reasons, encourage economic development, and manage financial risks.

What is the Primary Market?

The primary market, also known as the new issue market, is a fundamental component of the financial system where freshly issued securities are directly sold to the public for the first time.

In the primary market, issuers sell their securities to investors via initial public offerings (IPOs) or private placements. Through IPOs, a business exposes its shares to the general public for the first time, changing it from a private corporation into a publicly traded one.

What is the Secondary Market?

The secondary market, commonly called the aftermarket, is a critical component of the financial system where previously issued securities are purchased and sold among investors. Unlike the primary market, which deals with the original issuing of assets, the secondary market permits trading existing securities.

In the secondary market, investors buy and sell securities already issued in the primary market or have changed ownership via earlier exchanges.

Differences between Primary Market and Secondary Market

The financial system consists of two essential segments for trading securities: the Primary Market and the Secondary Market. These markets play distinct roles in issuing and trading financial instruments. Here are the major distinctions between the two markets:

Features of Primary Market

Primary Market involves direct interactions between issuers and investors, who acquire these new securities either through initial public offerings (IPOs) or private placements. Here are the key features of the Primary Market:

• Initial issuance of new securities.
• A direct relationship between issuers and investors.
• Involves IPOs or private placements.
• Underwriters and investment banks play a crucial role.
• Securities are priced at the offering price set by the issuer.
• Capital raised for funding projects or expansion.
• Limited access for a specific set of investors during the primary offering.
• Subject to strict regulatory scrutiny.

Features of Secondary Market

The Secondary Market facilitates the trading of existing securities. This market enhances liquidity by providing a platform for investors to buy or sell their holdings at prevailing market prices. Here are the key features of the Secondary Market:

• Trading of existing securities.
• Indirect relationship between buyers and sellers.
• Includes stocks, bonds, mutual funds, and other financial instruments.
• Brokerage firms, stock exchanges, and dealers act as intermediaries.
• Prices are determined by supply and demand forces in the market.
• No funds are raised for the issuer; transactions involve transfers of ownership.
• Open to a broader base of investors for buying and selling.
• Regulated to ensure fairness, transparency, and investor protection.

Regulations and Governing Bodies for Primary Market and Secondary Market

The primary and secondary markets in India are subject to robust regulatory oversight to ensure fair and transparent operations. The Securities and Exchange Board of India (SEBI) is the primary regulatory authority overseeing both markets. SEBI is an independent regulatory body established in 1988 to protect the interests of investors and promote the development and regulation of the securities market.

For the Primary Market:

• SEBI Act, 1992: This legislation grants SEBI its regulatory authority and outlines its functions and powers.
• Companies Act, 2013: It governs the issuance of securities by companies and prescribes disclosure requirements for companies going public.
• SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018: These regulations set forth guidelines for public offerings, disclosures, and listing of securities on stock exchanges.
• SEBI (ICDR) Regulations, 2018: The Issue of Capital and Disclosure Requirements Regulations lays down the framework for issuing capital, pricing, and allotment of securities.

For the Secondary Market:

• SEBI (Prohibition of Insider Trading) Regulations, 2015: These regulations prohibit insider trading and ensure fair trading practices in the secondary market.

• SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011: These regulations govern substantial acquisitions of shares and the mandatory open offer process.

• SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015: These regulations specify the obligations of listed companies towards disclosure and transparency.

• SEBI (Stock Brokers and Sub-brokers) Regulations, 1992: These regulations set the standards for the registration and conduct of stockbrokers and sub-brokers.

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