The capital market is divided into two, the primary and secondary market. Financial products like securities are sold and bought in the capital market. It is important to know what a primary market is and a secondary market. Knowing these two types of market will help you understand investing further. Here’s how primary and secondary market differ.
The primary market is the place for securities to be created when firms sell their first stocks and bonds to the public. It provides certificates because companies provide it to their investors. The transaction is in between an issuer and a buyer where the securities are directly bought from an issuer. The primary market is popularly known as New Issue Market (NIM) because it provides long-term equity capital that allows economy development. The primary market is more like an Initial Public Offering (IPO) where a private business decides to put up for sale stocks first time to the public. Here’s how the equity is raised in the primary market.
- Rights Issue
The right issue is when the company needs to have supplementary equity capital; on a pro-rata basis, they will offer shares to the current shareholders (pro-rata).
- Preferential Allotment
The preferential allotment is when the company issues the equity shares to a preferred number of investors. It will be at a price that can be of the market price or not.
- Private Placement
The private placement is where securities are sold to a limited number of exclusive investors that are usually their frequent investors. The private placement is what mutual funds and venture capital funds will come under. for more details contact us at Business services Melbourne.
- Public issue
Public issue is the fundamental way to sell financial securities instead of being privately funded by advocates of the company. The securities are sold to the general public. A good example is an Initial Public Offering (IPO). It gives anyone the chance to be able to own a part of the business but not a part of a controlling body.
The secondary market is where the primary market securities issued are bought and sold. This is where the stock exchange and brokers come into play to be the intermediary between sellers and buyers. The trade between investors won’t involve the company that issued the securities for sale in the primary market. The secondary market has two kinds of market, the auction market, and the dealer market.
- The auction market is the place where buyers and sellers give their bid and ask prices in public.
- The dealer market won’t have the buyers and sellers at the same location, unlike auction market. The buying and selling transactions are done through electronic networks with different software, phones, fax machines and customized order-matching machines.
Although the primary and secondary market is what makes up the capital market, they are entirely different from each other. The primary market is where securities are created. It can be issued through a rights issue, preferential allotment, private placement and public issue. The secondary market is simply where the securities are sought and sold either in an auction market or a dealer market.