Primary and Secondary Market

Topics: Stock exchange, Stock market, Initial public offering Pages: 5 (1496 words) Published: July 20, 2013
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Primary and Secondary Markets
The Primary market deals in newly issued securities where the price is fixed by the underwriter. Secondary markets deal with already issued stocks / bonds. The Primary market deals in newly issued securities where the price is fixed by the underwriter. Primary markets act as a source of new funds for the company issuing the stocks or bonds. Underwriters often reserve for themselves and their important clients a portion of the primary shares as part of their commission. Secondary markets deal with already issued stocks and bonds and are the securities markets that we are most familiar with, including the New York Stock Exchange and the NASDAQ market. Security prices are determined in secondary markets by supply and demand. When securities are sold on the primary market, the main recipient of funds is the company issuing the securities. When a transaction is made on the secondary market, the party (usually an individual or mutual fund) that owns and sells a security receives the money. In 1995, Netscape’s initial public offering (IPO) took place with great anticipation. Issued by a syndicate of underwriters lead by Morgan Stanley the IPO share price was first stated as $18. This is the price that shares would be sold in the primary market to preferred customers of the underwriting firms and the underwriters themselves. Due to heavy demand, the IPO price was raised to $25 by the day shares went public. When Netscape went public on the NASDAQ market, there was a delay of several hours after the opening bell as traders matched the volume of buyers and sellers who acquired shares in the primary market. Due to enormous demand, Netscape opened for trading at $54 a share, well above its stated IPO price. This is the price that average investors and many mutual funds would be able to buy their first shares of Netscape, yielding a good profit for primary shareholders who were selling.  Primary and Secondary Markets – The Primary market deals in newly issued securities where the price is fixed by the underwriter. Secondary markets deal with already issued stocks / bonds.

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PRIMARY MARKET
The primary market is that part of the capital markets that deals with the issuance of new securities. Companies, governments or public sector institutions can obtain funding through the sale of a new stock or bond issue. This is typically done through a syndicate of securities dealers. The process of selling new issues to investors is called underwriting. In the case of a new stock issue, this sale is an initial public offering (IPO). Dealers earn a commission that is built into the price of the security offering, though it can be found in the prospectus.

Features of primary markets are:

This is the market for new long term equity capital. The primary market is the market where the securities are sold for the first time. Therefore it is also called the new issue market (NIM). In a primary issue, the securities are issued by the company directly to investors. The company receives the money and issues new security certificates to the investors. Primary issues are used by companies for the purpose of setting up new business or for expanding or modernizing the existing business. The primary market performs the crucial function of facilitating capital formation in the economy. The new issue market does not include certain other sources of new long term external finance, such as loans from financial institutions. Borrowers in the new issue market may be raising capital for converting private capital into public capital; this is known as "going public." The financial assets sold can only be redeemed by the original holder. Methods of issuing securities in the primary market are:

Initial public offering;
Rights issue (for existing companies);
Preferential issue.

SECONDARY MARKET

The secondary market, also known as the aftermarket, is the financial...
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