What is the difference between primary and secondary markets?

What is the difference between primary and secondary markets?

• A. Primary market trades existing securities; secondary market deals with new issues.
• B. Primary market involves initial sale of stocks and bonds; secondary market trades existing securities.
• C. Both markets refer only to bonds.
• D. Secondary market is where initial public offerings occur.

Answer: (B)

The difference hinges on whether the security is new or already existing. In the primary market, a company or government issues new stocks or bonds to raise capital, and investors buy directly from the issuer, with the proceeds going to the issuer. In the secondary market, investors trade securities that have already been issued among themselves, and the money goes to the seller, not to the issuer. This setup also means IPOs occur in the primary market, while regular buying and selling of listed shares or bonds happens in the secondary market. The other statements misstate who receives funds, or limit markets to bonds, or place IPOs in the wrong market.

The difference hinges on whether the security is new or already existing. In the primary market, a company or government issues new stocks or bonds to raise capital, and investors buy directly from the issuer, with the proceeds going to the issuer. In the secondary market, investors trade securities that have already been issued among themselves, and the money goes to the seller, not to the issuer. This setup also means IPOs occur in the primary market, while regular buying and selling of listed shares or bonds happens in the secondary market. The other statements misstate who receives funds, or limit markets to bonds, or place IPOs in the wrong market.