A Basic Primary And Secondary Stock Market Guide
If you are a beginner, it is important to understand the basics of how the stock market functions in order to make prudent investment decisions that can consistently yield good returns. In this stock market guide, you’ll learn about some fundamental aspects of the market.
What is a stock market?
A stock market is a place where stocks, bonds and many other financial instruments are bought or sold. When referring only to shares of companies, it is also called the equity market. Members of the public may buy or sell company shares, derivatives, bonds and several other kinds of investment products. Products that are traded in the stock market are often referred to as securities.
Primary market
When a company makes its first public issue of shares, the transactions are said to take place in the primary stock market. In other words, a primary market is one where new issues are traded. All sale proceeds from dealings in the primary market go to the company that issues the shares. There are some unique characteristics of the shares issued in this market:
- They are issued with the aim of raising capital for the business.
- They are offered directly by the company, i.e. the investors buy from the issuer in this market.
- Usually, these issues are sold at a price within a pre-determined range to the investors.
Secondary stock market
When an interested investor wants to buy a share, which has already been issued by the company, he will have to engage in a secondary stock market transaction. The secondary market is simply a place where existing securities are bought and sold. Also referred to as the dealer market or the auction market, this is the place where most of the stock investment takes place. Some key characteristics of trades in this market are:
- Securities are bought and sold at ‘market value’ or the value at which they are currently available, which may be higher or lower than the ‘face value’ at which the share was originally issued by the company.
- The issuing company bases many management decisions on the performance of its stock in the secondary market. This market functions as a barometer of public opinion about the company and its prospects. Any crucial decision taken by the company, senior management changes, and market dynamics can affect the company’s share values drastically.
- The secondary market is further divided into equity and debt markets. Stocks are traded in the equity market, while corporate bonds are traded in the debt market.
Both the primary and secondary markets discussed in this stock market guide are essential parts of the investment world, but most investors refer to their transactions in the secondary market when they talk about stock market trading. When the secondary market is active and remains steady without major fluctuations, it demonstrates that the country’s economy is doing well. The stock markets thus function as an indicator of the industrial activity and investor confidence in a country.
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