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What Is the Connection between a Primary and Secondary Market?

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  • Written By: M. McGee
  • Edited By: Lauren Fritsky
  • Last Modified Date: 26 November 2016
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The primary and secondary market defines how a security is sold. On the primary market, a security is sold for the first time. This means that the seller is the original issuer of the security being sold. On the secondary market, the security is sold for the second or greater time. In most cases, this means that the two parties making the transaction have no direct connection to the original issuer of the security. While the primary and secondary market makes up the majority of the capital market, there is also a third and fourth market that round out the system.

Nearly anything can be broken down into a money value and traded as a security on the primary and secondary market. Stocks represent money going into a company in exchange for ownership rights. Bonds represent debt the company owes to outside parties. Commodities are semi-theoretical shares of basic goods that are used worldwide. These, and hundreds of other items, make up the capital market.

The capital market is broken down into submarkets that are defined by one of two things—how the security is sold or what the security is. The two methods of defining the market are exclusive from each other. For example, the primary and secondary market relate to the way the security is sold, rather than what the security actually is, while the stock market is only concerned with the type of security and not how it is sold.

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In the primary market, a security is issued for the first time and sold by its issuer. This is one of the main ways that new businesses raise capital. The company is divided into shares and given to the initial investors according to the size of their investment. The company then has an initial public offering (IPO) where investors that are not originally part of the company can buy into it.

The secondary market makes up the majority of the rest of the capital market. In this market, a security is sold through a common investment method any time after its initial sale. If the stock is sold a thousand times, each of these sales is on the secondary market.

While the primary and secondary market make up most of the capital market, there are two other aspects. The third market is composed of securities that are sold via a third party but outside of standard security exchanges. This is a common method of transferring currency using the foreign exchange market. The fourth market is made up of securities exchanges that happen directly between two parties with no oversight. These sales are totally outside typical regulatory procedures.

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