What is the difference between the primary market and the secondary market?

Question

In CS Executive Capital Market, I need to write the difference between primary and secondary markets with examples. What points should I cover?

GradeHunt_Team · Answer

The primary market is where securities are issued for the first time. The secondary market is where existing securities are traded among investors.

Primary market (new issue market):
- The company issues new securities and receives the money. The exception is an offer for sale, where existing shareholders sell their shares through the IPO and they, not the company, receive the proceeds.
- Methods: IPO, follow-on public offer, rights issue, private placement, preferential allotment, qualified institutions placement.
- Price is set by the issuer, either as a fixed price or through book building, where investors bid within a price band and the issuer fixes the final price based on the bids received.
- It helps companies raise long-term capital.
- Intermediaries include merchant bankers (lead managers), registrars to the issue, bankers to the issue and underwriters.
- Regulated mainly by the Companies Act, 2013 (prospectus and allotment provisions) and the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018.

Secondary market (stock market):
- Investors buy and sell among themselves; the company receives nothing from these trades.
- Trading happens on recognised stock exchanges through brokers, with clearing and settlement by clearing corporations, and shares are held and transferred through depositories.
- Prices are set by demand and supply.
- It gives liquidity and continuous price discovery, which in turn makes investors willing to buy in the primary market.
- Regulated by the Securities Contracts (Regulation) Act, 1956, the SEBI Act, 1992, the Depositories Act, 1996, SEBI regulations and stock exchange rules.

How they are linked:
A strong secondary market makes it easier to raise money in the primary market, because investors know they can sell later.

Exam tip: write at least six points of difference (meaning, who receives the money, pricing, purpose, intermediaries, regulation), then one line on their link. For a question that says "distinguish", a point-wise answer or a two-column table is easiest to follow.

What is the difference between the primary market and the secondary market?

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