Question

Discuss any four differences between primary market and secondary market.

Hint:

Primary market deals with new issues, while secondary market deals with trading of existing securities.

Answer 1

The primary market and secondary market are two important components of the capital market.
They differ from each other on several bases. The four major differences are discussed below:
1. Meaning:
The primary market is the market where new securities are issued for the first time directly by the company to investors.
The secondary market is the market where existing securities are bought and sold among investors.
2. Flow of Funds:
In the primary market, funds flow directly from investors to the issuing company, helping the company raise capital.
In the secondary market, funds flow from one investor to another, and the company does not receive any funds from such transactions.
3. Purpose:
The main purpose of the primary market is to mobilize savings and provide funds to companies for expansion and growth.
The main purpose of the secondary market is to provide liquidity to securities so that investors can easily buy or sell them.
4. Price Determination:
In the primary market, the price of securities is fixed by the issuing company in consultation with experts.
In the secondary market, prices are determined by demand and supply forces in the stock exchange.
Thus, both markets perform different but complementary functions in the capital market system.