Primary and secondary markets explained

Understanding the functions of a primary market and a secondary market is useful for investors. We explain everything you need to know.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Business man on stock market crash financial trade indicator background.

Image source: Getty Images

The words ‘primary’ and ‘secondary’ might make you think of school or colours, but here we’re talking about markets. It’s important to understand the difference between a primary market and a secondary market.

These financial markets play a key role in keeping our economy healthy. I’m going to explain everything you need to know about how they work and why they’re important.

5 Stocks For Trying To Build Wealth After 50

One notable billionaire made 99% of his current wealth after his 50th birthday. And here at The Motley Fool, we believe it is NEVER too late to start trying to build your fortune in the stock market. Our expert Motley Fool analyst team have shortlisted 5 companies that they believe could be a great fit for investors aged 50+ trying to build long-term, diversified portfolios.

Click here to claim your free copy now!

What is a primary market?

The main goal of a primary market is to raise new money.

This is a common strategy for governments and companies. Securities like bonds and stocks are first sold in a primary market.

Examples include:

  • Initial public offerings (IPOs): This is where a private company issues and sells stock to the public for the first time. You may have noticed Airbnb shares recently made headlines following their IPO.
  • Government bonds: Treasury bills or gilts may be issued and sold by the government in order to raise money to pay down debt.

What is a secondary market?

The main purpose of a secondary market is for people to be able to resell the securities created and sold from a primary market.

A healthy secondary market is really important for a healthy economy. If people purchasing securities through a primary market couldn’t resell them, they’d perhaps not make the purchase in the first place. This could bring the economy to a standstill.

Examples of secondary markets include:

  • Stock exchanges: Where investors have the opportunity to buy and sell shares from each other, rather than direct from the issuer.
  • Foreign exchange markets: Traders and companies can buy and sell currencies from across the globe.

Why do we need them both?

A good way to think of these markets is as two intersecting cogs in an engine. Both markets move independently but are also reliant on each other.

The movement of these markets acts as fuel and energy for our whole financial system. They keep things fluid and moving like a well-oiled machine.

The new influx of money from a primary market allows growth. Then the liquidity of a secondary market allows both flexibility and stability.

How are investments valued in each market?

In a primary market, the price of a security is stable. The pricing level decision may come from governments or investment banks.

Estimating the value of investment securities happens before they reach a primary market, but the true market value tends to be realised in secondary markets.

This is because more people have access to the investment and because things like supply and demand will affect the price.

Which market will most investors use?

Most individual investors will make the majority of their purchases through a secondary market.

However, sometimes, investing in things like investment trusts or mutual funds will be an indirect way of making purchases from a primary market.

Occasionally, individual investors may also purchase something like gilts directly from the Debt Management Office (DMO).

Primary and secondary market takeaways

Primary markets allow the raising of new money by companies or governments. Popular examples include IPOs and government bonds.

In a secondary market, these newly created securities can be bought and sold by investors. Most people will do the majority of their trading in secondary markets like a stock exchange.

Is this little-known company the next ‘Monster’ IPO?

Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.

Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.

The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.

But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.

Click here to see how you can get a copy of this report for yourself today

More on Personal Finance

Note paper with question mark on orange background
Personal Finance

Should you invest your ISA in a model portfolio?

Which model ISA portfolios offer both high performance and low fees? Hargreaves Lansdown, Interactive Investor and AJ Bell go under…

Read more »

Economic Uncertainty Ahead Sign With Stormy Background
Personal Finance

Is it time to exit emerging markets investments?

Investors may well be sitting on losses from emerging markets funds. Is it worth keeping the faith for a sustained…

Read more »

Personal Finance

Share trading? Three shares with turnaround potential

Share trading has been difficult in 2022, but which companies have turnaround potential? Jo Groves takes a closer look at…

Read more »

Man using credit card and smartphone for purchasing goods online.
Personal Finance

Revealed! Why Gen Z may be the savviest generation when it comes to credit cards

New research reveals that Gen Z may be the most astute when it comes to credit cards. But why? And…

Read more »

Environmental technology concept.
Personal Finance

The 10 best-performing sectors for ISA investors

The best-performing sectors over the past year invested in real assets such as infrastructure, but is this trend set to…

Read more »

Road sign warning of a risk ahead
Personal Finance

Recession risk ‘on the rise’: is it time for investors to worry?

A major global bank has suggested the risk of a recession in the UK is 'on the rise'. So, should…

Read more »

pensive bearded business man sitting on chair looking out of the window
Personal Finance

1 in 4 cutting back on investments amid cost of living crisis

New research shows one in four investors have cut back on their investing contributions to cope with the rising cost…

Read more »

Image of person checking their shares portfolio on mobile phone and computer
Personal Finance

The 10 most popular stocks among UK investors so far this year

As the new tax year kicks off, here's a look at some of the most popular stocks among UK investors…

Read more »