Q.Distinguish between Primary Market and Secondary Market on any four bases.
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Start your 14-day free trial to unlock the full solution →Primary markets facilitate the issuance of new securities to raise fresh capital for companies, while secondary markets enable the trading of existing securities among investors, providing liquidity and price discovery.
Financial markets are crucial for economic growth, acting as a bridge between those who have surplus funds (savers) and those who need funds for investment (borrowers or companies). Within this broad category, the distinction between the Primary Market and the Secondary Market is fundamental to understanding how capital is raised and how investments are subsequently managed.
The core idea is about the timing and purpose of the transaction. When a company needs to raise fresh capital for expansion, new projects, or debt repayment, it approaches the Primary Market. This is where new securities are born. Once these securities are issued and held by investors, if those investors wish to sell them or new investors wish to buy them, they turn to the Secondary Market. This market doesn't involve the company directly in the transaction; it's about investors trading among themselves. This dual structure ensures that companies can access capital and that investors have the flexibility to buy and sell their holdings, providing essential liquidity.
Here are four key bases to distinguish between the Primary Market and the Secondary Market:
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Purpose/Function
The primary market's main purpose is to facilitate capital formation for companies. It is where companies raise fresh funds by issuing new shares or bonds to the public for the first time. Think of it as the initial fundraising stage.
The secondary market, on the other hand, does not directly raise capital for the issuing company. Its primary functions are to provide liquidity to investors (allowing them to easily buy and sell existing securities) and to facilitate price discovery (determining the fair market value of securities based on demand and supply).
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Nature of Securities Traded
In the primary market, only newly issued securities are traded. These include Initial Public Offerings (IPOs), Further Public Offerings (FPOs), rights issues, and private placements. The transaction is always between the issuing company and the investor.
The secondary market deals exclusively with existing securities that have already been issued in the primary market. Investors trade these previously issued shares, bonds, or other financial instruments among themselves. The issuing company is not a party to these transactions.
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Participants Involved
The key participants in the primary market are the issuing company (the entity raising capital), investors (who subscribe to the new issues), and various intermediaries such as merchant bankers, underwriters, registrars, and brokers, who help manage the issuance process.
In the secondary market, the main participants are investors (buyers and sellers of existing securities), brokers (who execute trades on behalf of investors), and the stock exchanges (which provide the platform for trading). The issuing company is typically not involved in individual secondary market transactions.
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Price Determination …
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