The capital market is an institution or company that are set up to raise capital. The company issue securities and the investors buy those securities. In return, the investors give capital to the company. This is what a capital market is mostly for.
The capital market is of two types, that is, primary capital market and secondary capital market. There is a very basic difference between the two markets which is described below in detail.
The primary market is a market where the company is directly participating in the market and is issuing new securities, such as debt or equity, or combination of both. They are sold to the potential investors, and the investors are buying those securities in exchange for capital.
Primary Market Operations
There are two examples of primary market operations both of which are the new securities launched by the companies to raise capital. These are:
- IPO (Initial Public Offerings)
- NCD (Non-Convertible Debentures)
IPO is a part of equity and NCD is a type of financial debt security.
Suppose a company does an IPO and it issues new shares. The investors are participating in this by buying these new shares. Now, after few months if the investor needs money and wants to sell these securities or shares, then the investor must go to the company and ask them to buy those shares. The company may tell the investor in return that they have ongoing or coming projects that are capital intensive and hence it is not possible for them to buy those shares.
What you can do as an investor in this situation is that you go to some other investor who is willing to buy those shares. But, the problem is that where you would find such an investor?
This is when the secondary market comes into the picture.
The stock market is the primary example of the secondary market system. It is the market where two different investors participate in buying and selling of financial securities. The company, such as, Investors Hangout
, whose shares are traded in the secondary market, need not to a participant in the market. Therefore, both the investors will not be related to the company in any way.
The difference in the primary and secondary market?
This difference is because the shares in the secondary market are second hand. The investor first participates in the IPO or NCD of a corporation, and when the investor shares it to another investor, it is a type of second-hand selling of shares.
However, in case of the primary capital market, the company shares are sold directly to the investor. Either the investor will keep these shares or give it back to the company, it will stay in the primary market. If sold to some other investor, the shares will enter the secondary market.
Whether it is first hand or second hand, there is no prominent impact in the market for financial securities. This is just to differentiate the two ways that an investor uses in selling and buying shares or securities in the capital market.