Primary and Secondary Capital Markets

What is the capital market? How is the primary market different from the secondary market?

The capital market refers to the trade of financial securities, such as stocks and bonds, with a long-term maturity date between individuals and institutions. The capital market is comprised of the primary and secondary market. The primary market is where new securities are traded while the secondary market is where used, or previously traded, securities are traded. The capital market relies on the timely interaction between corporations and investors in the primary and secondary market for an efficient system.

In the capital market, the initial step is the selling of financial securities, such as stocks and bonds, to investors by a corporation in order to raise funds through the primary market. A corporation only receives money for its securities the first time they are issued. An initial public offering, or IPO, is the first time a corporation makes its securities available to the public while seasoned new issue refers to additional securities being made available to the public of a corporation that has previously released securities to the public. The corporation then uses the funds that have been raised from the sale of these securities to invest in the organization generating new assets and increasing operations. The cash flow generated from the new assets and increased operations is then reinvested in the organization, paid back to investors (dividends), or paid to the government in the form of taxes.

Once the new securities are traded by the corporation on the primary market, the securities are thereafter traded on the secondary market. The securities are no longer handled by the corporation but are traded among investors. An investor selling a security receives the money for the security and not the original corporation. As stated previously, the corporation would only receive money for the initial sale on the primary market. The securities traded by investors in an efficient market are supposed to represent the expected earnings and risks of the corporation and thus reflect the true value of that corporation.