What is the difference between a Primary and Secondary market?

A market is a place where trades take place. A stock market is a place where stocks are traded between people. Some people sell and some people buy. A person cannot sell if there are no buyers and vice versa. A stock market can further be broken down into Primary markets and Secondary Markets.

Primary Markets

If you read newspapers and watch business news channels, you would have probably heard of an IPO. An IPO is an initial public offering, through which a company raises capital to run its business. Think about a situation, where in you need to raise money for starting or doing a business. Either you could go to a bank or go to the people. When people lend, they buy shares in your company and become owners i.e equity(equal) shareholders in your company.

A company can do an IPO in the market with the help of a merchant or an investment bank. The investment bank has the expertise of architecting the IPO for a company. After an IPO the company gets listed in the stock market, and the company gets the required capital.

Secondary Markets

Once the company is listed in the market, the shares can be actively traded in the markets. If the company is doing well and has a bright future more and more people will be interested in owning the shares of the company(stock price goes up), and if the company is not doing well people will sell(price goes down). All this activity is done in the secondary market.

Example.

The most recent popular listing in the market was SKS Microfinance. The company already had a running business and needed more capital to expand its business. Thereofore, the company took the equity route to raise capital. Kotak Mahindra Bank, which is an investment bank helped the company list in the market. Now since the company has made a successful listing, the shares are actively traded in the market(secondary market).