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Primary and Secondary Market Differences

All the details between primary and secondary markets.

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February 5, 2020

No other industry is filled with confusing concepts and terminology quite like the financial industry. Even the definitions of "primary market" and "secondary market," deceptively simple terms in and of themselves, don't follow conventional norms.

To understand how these markets work, investors must be familiar with the concepts of primary, secondary, private, and public markets, to name a few. And these markets all have major differences: some have freely tradable options, some are only available for a limited time, and some are less restrictive than others.

Before a company can become publicly traded, however, they exist in what's known as the private market. Let's start here.

Private Market vs. Public Markets

The private market in the investing industry is where companies that have not yet offered up a part of their ownership for public sale reside. This includes companies that have raised rounds of funding with institutional investors such as investment bankers, hedge funds, and venture capitalists. It also includes companies that have not raised any funding, known as pre-transacted or bootstrapped companies.

The private market is much larger in terms of the number of companies available than those in the public markets. According to Forbes, fewer than 1% of all companies are traded publicly. In this way, privately transacted and pre-transacted companies are incredibly important for investors who are looking to invest their money. But, the right opportunity can be difficult to find. Investors usually seek the help of platforms that can offer private company data to find the perfect company in which to invest.

When a company does offer ownership known as stocks or shares within the public markets to a private investor, the terms are usually defined as a percentage of equity. The percentage sold during the private transaction compared against the amount of money raised is one method of determining a company's valuation. This is an important metric for both future rounds of funding, as well as the share price if that company decides to "go public" (i.e. sell ownership of the company on the public markets).

While there is essentially only one big private market, public markets are more defined and are split into two types: primary and secondary markets.

What Are Primary and Secondary Markets?

When people think of and refer to "the market" when it comes to investing, it's most likely the stock market, where securities such as stocks are offered openly and traded publicly. It may come as a surprise, then, that the stock market is actually what's considered the "secondary market."

While primary and secondary markets do both usually involve the public trading of securities, each serves its own purpose. Before we can delve into the details of secondary markets, it's important to understand what a primary market is, what securities are traded on it, and how they get there.

What Is the Primary Market?

Put simply, the primary market is where securities are offered for sale, or "issued," for the first time. Companies are usually leaving the private market and going public when they come onto the primary market. Also known as the new issue market, the primary market is one way that companies can raise capital for growth by going through what's called an Initial Public Offering (IPO). However, company stocks aren't the only type of security available on the primary market.

Primary Market Example Securities

While the securities listed below are not an exhaustive list of everything available through the primary market, this list does give an overview of the breadth of offerings created in the market:

  • Stocks: A type of security that represents a portion of ownership in a company, stocks are offered by the company itself in the primary market.
  • Government bonds: These popular securities are issued directly from a governing body and offer a guaranteed, fixed rate of interest. For example, below are 3 types of bonds offered by the U.S. Treasury that differ only in their name and maturity terms:
    o Treasury bills: Less than 1 year
    o Treasury notes: 2, 3, 5, 7, or 10-year
    o Treasury bonds: Range between 10 and 30 years
  • Corporate bonds: Almost the same thing as a government bond, corporate bonds offer a guaranteed, fixed interest rate, but the issuer is a company.
  • Exchange-Traded Funds (ETFs): These securities represent a batch of assets and are traded as a set. ETFs are usually a collection of stocks, bonds, and commodities, even precious metals such as silver and gold.

Three Types of New Issues

Just as there are many types of securities available on the primary market, there are different methods for securities being offered:

Initial Public Offering (IPO)

Companies that are transitioning from operating within the private market to operating publicly undergo a process known as an Initial Public Offering (IPO). This is where shares of that company are offered for sale to the general public for the first time to raise capital. This is one exit strategy for the investors who purchased equity in the company while it operated in the private market, as they will get shares for their equity investment that they can then sell on the public markets.

For the IPO, the company wishing to go public must hire underwriting firms to determine at what price per share the company stock will debut, known as the issue price. Public investors can then purchase stock directly from that company.

Private Placement

In contrast to an IPO, companies also have the ability to offer securities to a small group of investors, whether commercial or individual. This might involve an investment bank, hedge fund, or even a single party such as a venture capitalist. Since private placements are offering new shares of a company, they reside within the primary market.

However, they do operate wholly within the private market, the exception to the general rule that new issues are part of the public markets. Private placements are subject to fewer regulatory issues, which makes them ideal for startups and companies that are in their early growth stages and require capital, but don't wish to go public yet.

Rights Issue

Sometimes referred to as a "rights offering," this issue event produces additional new shares for purchase on an already-public company. Rights issues impose a strict limit on which investors have access to the sale, only giving existing shareholders "rights" to purchase new shares at a discounted price for a certain time period. This issue event is one way for companies to raise capital after going public.

What Is the Secondary Market?

As discussed earlier, the stock market, or stock exchange, is the secondary market. In contrast to the primary market (where shares are offered for the first time only by the original issuer), the secondary market is where shares are traded publicly between any type of investor, including individual investors. For example, if an investor buys a share of a company, they are buying that share from another investor, not the company itself.

The secondary market, however, is not limited to just company stocks. Bonds (both government- and corporate-issued), ETFs, and other types of securities are available for trade on the secondary market.

Secondary Market Examples

Many secondary markets exist, located all over the world. Below are a few examples of the largest secondary markets:

  • New York Stock Exchange (NYSE)
  • Nasdaq
  • Japan Exchange Group
  • Shanghai Stock Exchange
  • Hong Kong Exchange
  • Euronext Europe
  • London Stock Exchange Group

Dealer vs. Auction Markets

Not all secondary markets operate in the same way. Auction markets, for instance, function by all investing parties collecting in the same area and announcing their buy and sell prices ("bid" and "ask" prices, respectively). The New York Stock Exchange (NYSE) is an example of an auction market. A dealer market, on the other hand, doesn't have the same restrictions. Instead, dealers provide the bid and ask prices for the securities they have, and potential investors can choose which dealer to do business with. The Nasdaq is an example of a dealer market.

The Difference Between Primary and Secondary Capital Markets

Both types of public markets, the primary and secondary markets, operate where shares are offered to the general public (with few exceptions). The main difference between primary and secondary markets is first, who is offering the shares for purchase, and second, if the shares have been on the market before.

Primary markets only offer shares for the first time and the issuing company itself is selling its own shares (e.g., Apple is selling new, never-before-sold shares to the market). Secondary markets are shares traded after they've hit the primary market, commonly known as the stock exchange.

Where to Go Next

The investment industry is full of opportunities, no matter if they're on the private market vs public markets. Investors who are looking to make their next potential transaction have a wealth of options available. But knowing the right opportunity to pursue in their target market can be a difficult call to make.

Fortunately, there are a number of data service providers with a wealth of highly accurate and easily accessible knowledge around both public and private companies. For help determining which data platform is the right fit for your investment needs, download this free guide.