What’s the Difference between the Primary and Secondary Market?

To get a full understanding of how securities like stocks and bonds are traded, investors should be aware of the primary and secondary market – how they work and how they differ.

The Primary Market

To raise capital, corporations sometimes issue shares and bonds which can be purchased directly from the issuing company or government entity. This is the first chance for investors to purchase a new security and it is accessible through the primary market. These sales are usually referred to as the Initial Public Offering (IPO). Once the securities are sold to the public through the primary market, subsequent sales take place on the secondary market.

Related: Investing in IPOs – How does it work?

The Secondary Market

You’ll likely be more familiar with the secondary market, which is better known as a stock exchange or share market. The secondary market is a transparent and regulated marketplace where securities can be bought and sold.  Although, stocks are the most common security traded on the secondary market, managed funds and bonds can also be exchanged through this market by investment banks and corporate investors.

Key differences between the Primary and Secondary Market

Price

In the primary market the initial price of an asset, whether it is stocks or bonds, is set by the corporation in conjunction with the investment bank. For government bonds, the price is set by the government and the Central Bank. 

Whereas, on the secondary market the price is determined by market forces and the supply and demand of investors. Therefore, the secondary market fluctuates and can be quite volatile.

Access

Accessing the primary market is notoriously difficult for the average investor. Typically, IPOs are reserved for institutional investors, and if an IPO is available to retail investors they will have to liaise with a stock broker and have a brokerage account. However, even having a brokering account is not a guarantee that you will be able to invest in an IPO, it will depend on the brokerage house that your using. Some brokerages receive more allocations than others, some don’t receive any at all.

The secondary market can be accessed through an online share trading platform or through a stock broker.

Transactability

On the primary market, you can only sell a security once, and that sale is typically made from the corporation or government to the institutional investor. With the secondary market, on the other hand, securities can be bought and sold multiple times.

Financing

The purpose of the primary market is to raise funds for organisation so they can expand their operations. The secondary market, on the other hand, does not provide finances to the company. This is because the shares are traded between investors who have speculative motives and it involves the exchange of shares from one investor to the other.