The Primary and Secondary Stock Markets: What they Mean and How You Use Them
An Acceler8now.com Investing Education Resource July, 2007
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If the terms, 'primary stock market' and 'secondary stock market' have not been clear to you, this article is for you. We will not only explain what they mean, but show what implications they have for you as an investor. One general point is that they do not refer to different markets in a locational sense - the market is the same.
Primary Market
This refers to fresh offers - the 'tear-rubber' stocks - coming straight from the issuing company. The primary market is the window through which companies raise fresh funds: the subscription payments by investors get to the company which came out with the offer because it needed additional capital. It doesn't matter which vehicle the company uses: IPO, public offer, rights issue, etc (read more on offer types here). Features include that there must be an approval by the regulator (Securities and Exchange Commission), there is usually a prospectus showing the facts of the offer, an approved transaction price is stated, opening and closing dates of the offer are specified and the funds go to the company, through the appointed receiving agents to whom all buyers pay. Offers for the primary market get significant advertising from the company because it's anxious that the offer succeeds. Most-important for the investor: you won't buy from the primary market as and when you want. If a company is not in the market currently to raise money, you can't make a primary purchase of its' shares. But the secondary window is quite open.
Secondary Market:
This is the 'tokunbo' market, if you like. Those who bought in a primary offer often need to resale in order to apply funds to other purposes or if they no longer want that particular investment. That offers an opportunity to others who want the stock, either as first-time buyers or to increase their existing holdings. So, the secondary market is the resale market for shares. This is the market that runs everyday and gets reported in newspapers and on TV. That is where the stockbrokers trade on stocks. Features: prices are determined by the day's trading, the company no longer receives the money as it is the previous investor who resales his shareholding and gets the proceeds, this is a daily (work days) market, all shares listed on the exchange are open to transactions and the market is open to every investor who is of age. Get it: you can buy from this market virtually every business day. This point is made because some uninformed investors have sometimes asked when a particular company will be selling shares again (after missing out on a primary offer and now observing strong price gains). Any time you have money and want to invest in the shares of a particular company, you can instruct a stockbroker to buy it for you. He places a bid for it and the moment an offer is available he can buy for you, notwithstanding that the company itself may not sell shares directly for the next five years!
The meaning of all this is that you have two potential sources to buy shares from: primary market, if and when a company has a new offer to raise more capital; secondary market at any time you are interested in investing in the particular company. So, don't hold your money waiting for when a company will come to the market.
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It's important to point out that though the sale proceeds in the secondary market don't go to the coffers of the company, the secondary market is still important to it in many ways. One, that's where the current market price of the stock is determined and this is important to any company and it's shareholders. Two, the liquidity or marketability created by the secondary market gives the primary market strength. If investors were not sure they could resale their shares, it is difficult to figure out how much of the primary offer they would pick up. The capital gains potential of the secondary market also helps to bolster the primary offer. On the other hand, the primary market offers help to inject more capital into the business, enabling companies to consolidate or expand and execute various growth programmes that mean more earning power for the business. This then plays out in the secondary market where the company's boosted performance, if achieved, will drive activity momentum and possibly lever up the stock price. As you see, both markets are intertwined. You can also invest in both. Besides, their existence guarantees you a continuous stretch of opportunity to invest in any stock.
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