What distinguishes primary markets from secondary markets?

The distinction between primary markets and secondary markets is foundational in understanding how securities are issued and traded. The primary market is where securities are created and offered to investors for the first time. This is typically conducted through initial public offerings (IPOs), where companies sell shares to raise capital. Investors participating in primary markets are purchasing new securities directly from the issuer.

In contrast, the secondary market is where previously issued securities are traded among investors. This includes the buying and selling of stocks and bonds that have already been issued in the primary market. Transactions in the secondary market do not result in funds going to the issuing company; instead, they occur between investors.

This distinction highlights the different roles that each market plays in the financial system. Understanding that primary markets serve as the platform for new securities and that secondary markets facilitate trading and liquidity for those securities provides essential insight into capital markets.