What is the difference between a primary and a secondary market?
Fsp Invest, 13 Dec. 2013
Tags: primary market, secondary market, financial market, the difference between a primary and a secondary market
When you buy shares and bonds, you’re taking part in either a primary or a secondary market for those products. But what is the difference between a primary market and a secondary market?
Different types of markets explained
The issuers of those shares may be trying to raise money for a new investment or they may be ‘going public’.
Sometimes companies who are already public companies will issue a new batch of shares. That’s also a primary market.
So that’s the basis of how the primary market works. But what about secondary markets?
The secondary market is the market on which you’d resell previously issued shares or bonds.
A stock exchange is an example of a secondary market, on which you can trade previously issued shares of listed companies.
You can also buy new issue shares on a stock exchange.
So you can buy shares when a company goes from private ownership to private ownership. Or when a public company issues a batch of new shares.
This is a primary market.
This is a secondary market.
Should I buy shares in a primary market or a secondary market?
You can buy share in both a primary market and a secondary market.
But if you buy the shares of a company that’s just become public, you are often taking a risk… Because often that company is new, and no-one knows how its stocks will behave when it goes public.
And when a company that is already listed on the stock exchange issues a new batch of shares, it will dilute the value of the shares already in circulation!
So you’ll have to own more shares to make the same amount of gains.
If you’re going to make a success of your investment journey, you should have a basic understanding of how primary and secondary markets work in practice.
And some of the pitfalls that go along with participating in either type of market.
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