Classification by Seasoning and Timing of Claim

Two further classification angles matter just as much as the ones already covered — the seasoning of the claim (is the security being issued for the first time, or is it an already-existing security changing hands?) and the timing of delivery/settlement (is the transaction settled immediately, or at a future date?).

Classification by seasoning of claim — Primary market and Secondary market:

• Primary market (also called the new issue market) is the market in which securities are issued and sold for the first time, with the funds raised going directly to the issuing company or government. Methods of raising funds in the primary market include a public issue/Initial Public Offer (IPO), a rights issue (offered first to existing shareholders), and a private placement (offered to a select group of investors).
• Secondary market (commonly known as the stock market/stock exchange) is the market in which already-issued securities are subsequently bought and sold among investors. No new funds flow to the original issuing company in a secondary-market transaction — ownership of the existing security simply changes hands from one investor to another, at a price the market itself determines.

The primary and secondary markets are closely linked in practice: a healthy, liquid secondary market (where an investor knows they can resell a security quickly if needed) is what makes investors willing to subscribe to new issues in the primary market in the first place. Without an active secondary market, the primary market itself would struggle to attract investors.

Classification by timing of delivery — Cash/Spot market and Forward/Derivatives market:

• Cash market (also called the spot market) is the market in which securities are bought and sold for immediate delivery and payment, at the price prevailing at that moment. Most ordinary buying and selling of shares on a stock exchange happens in the cash market.
• Forward market (also called the derivatives market) is the market in which a contract is entered into today for the delivery and payment of a security (or an agreed underlying asset) at a specified future date, at a price agreed upon in advance. Instruments traded here — such as forwards, futures, and options — are called derivatives, because their own value is derived from the value of an underlying asset (a share, an index, a commodity, or a currency), rather than having independent value of their own. Derivatives are commonly used either to hedge against future price risk or to take a deliberate position on the expected future price movement of the underlying asset.