Understanding different markets

Published on 15th October 2020
In respect to shares of a public company, the most commonly known terms are the “Primary market” and the “Secondary market”. The primary market refers to the market where securities are created, while the secondary market is one in which they are traded among investors. Investors who are interested in trading of stocks should have a good understanding of these markets, especially the key characteristics of them.

The primary market is where securities are created. It’s in this market that firms sell newly issued stocks and bonds to the public for the first time. An initial public offering (IPO) takes place through the primary market. The Government or public sector institutions raise money through bond offerings through the primary market. The important thing to understand about the primary market is that securities are purchased directly from an issuing company.

The secondary market is commonly referred to as the “stock market.” This includes all major exchanges around the world. The defining characteristic of the secondary market is that investors trade among themselves. That is, in the secondary market, investors trade previously issued securities without the issuing companies’ involvement. Sometimes you’ll hear a dealer market referred to as an over-the-counter (OTC) market. The term originally meant a relatively unorganized system where trading did not occur at a physical place, as we described above, but rather through dealer networks. The term was most likely derived from the off-Wall Street trading that boomed during the great bull market of the 1920’s, in which shares were sold “over-the-counter” in stock shops. Nowadays, the term “over-the-counter” refers to stocks that are not trading on major stock exchanges.

Without the existence of the above-mentioned markets it would be difficult for investors to buy or sell shares. In the absence of an organized secondary market, shareholders would have to personally track down other investors just to buy or sell a stock, which would not be an easy task. In fact, many investment scams revolve around securities that have no secondary market, because unsuspecting investors can be swindled into buying them. The importance of markets and the ability to sell a security (liquidity) is often taken for granted, but without a market, investors have few options and can be stuck with big losses. Therefore, when it comes to the markets, what you don’t know can hurt you, and in the long run, a little education might just save you some money.

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