Primary and Secondary Market Structures

In Finance, a market is a place where there is buying and selling of financial securities like shares, bonds, derivative products, etc. There are various regulations which govern the financial market to protect the interest of the interested parties.
There are 2 types of market structures in finance:
  1. Primary Market
  2. Secondary Market

Primary market

  • A market where the securities are created i.e. it is issued for the first time for getting raising capital.
  • IPOs and FPOs are used for issuing securities.
  • Brokerage firms play an important role in the issuance of securities for the first time.
  • Companies and Investors are involved in the Primary market.
  • The company advertises its issue so that Investors invest in it.

Secondary market

  • A market where the trading i.e. sale and purchase of the various securities takes place.
  • There are regulations imposed for protecting the interest of the interested parties. It can be in the form of the circuit the percentage below or above which a particular share is not allowed to trade, etc.
  • Investors are involved in the secondary market, one is the seller and the other is the buyer. Investors use various tools like price-earnings ratio, price to book value, etc. As can be seen in the above image, XYZ Inc. issued some shares to Investor A for some consideration. This is an example of a Primary Market.
  • And when investor A sells shares to Investor B for consideration, then it is an example of a Secondary market.
Primary Market: 
  • Here, companies sell stocks to the public for the first time.
  • This is done through a process known as Initial Public Offering (IPO)
Secondary Market:
  • Here, investors and traders buy and sell stocks to each other.
  • The company does not participate in these transactions.

Secondary market is further divided into 2 types:

  1. Auction market: In this type of market, all the buyers and sellers comes to a commonplace and announces the price on which they are willing to buy or sell their securities. This is an auction of the share. This market is also called Over-The-Counter markets.
  2. Dealer market: In this type of market, buyers and sellers do not come together for buying or selling, rather a third party who is the broker buys and sells shares on the order of the buyer or seller. This market is also called Stock Exchanges.
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