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A study on the primary vs. secondary market gives information on the various
aspects of the capital market trading. Both the primary market and secondary
market are two types of capital market depending on the issuance of securities.
2.1-Primary Market Definition:
The primary markets deal with the trading of newly issued securities. The
corporations, governments and companies issue securities like stocks and bonds
when they need to raise capital. The investors can purchase
the stocks or bonds issued by the companies.
Money thus earned from the selling of securities goes directly to the issuing
company. The primary markets are also called New Issue Market (NIM). Initial
Public Offering is a typical method of issuing security in the primary market. The
functioning of the primary market is crucial for both the capital market
and economy as it is the place where the capital formation takes place.
2.2-Secondary Market Definition:
The secondary market is that part of the capital market that deals with the
securities that are already issued in the primary market.
The investors who purchase the newly issued securities in the primary market sell
them in the secondary market. The secondary market needs to be transparent and
highly liquid in nature as it deals with the already issued securities. In the
secondary market, the value of a particular stock also varies from that of the face
M.Azmat Awan MA Eco, MBA Banking & Finance, MS Islamic Banking & Finance CP2000 SIALKOT
MONEY & CAPITAL MARKETS (8526)
value. The resale value of the securities in the secondary market is dependent on
the fluctuating interest rates.
Primary vs. Secondary Market:
Primary vs. secondary market says that the primary market deals with the newly Page | 2
issued securities while the secondary market deals with already traded securities.
When the companies issue securities in the primary market, they collect funds
directly from the investors through the securities sales. But, in the secondary
market the money earned from selling a security does not go to the company. The
money thus earned goes to the investor who sells the security. The pricing in the
secondary market is entirely different from the pricing in the primary market.
2.3- Money Market: Money market the market for short-term debt securities
with maturities of less than one year.
A segment of the financial market in which financial instruments with high
liquidity and very short maturities are traded. The money market is used by
participants as a means for borrowing and lending in the short term, from several
days to just under a year. Money market securities consist of negotiable certificates
of deposit (CDs), bankers acceptances, U.S. Treasury bills, commercial
paper, municipal notes, federal funds and repurchase agreements (repos). The
money market is used by a wide array of participants, from a company raising
money by selling commercial paper into the market to an investor purchasing CDs
as a safe place to park money in the short term. The money market is typically seen
as a safe place to put money due the highly liquid nature of the securities and short
maturities, but there are risks in the market that any investor needs to be aware of
including the risk of default on securities such as commercial paper.
2.4- Capital Market: The part of a financial system concerned with raising
capital by dealing in shares, bonds, and other long-term investments. So Capital
markets are the markets where securities such as shares and bonds are issued to
raise medium to long-term financing, and where the securities are traded. The
securities might be issued by a company which could issue shares or bonds to raise
money. Bonds could also be issued by other entities in need of long-term cash,
such as regional or national governments. The securities are issued in what is
known as the primary market and traded in the secondary market. In the primary
market a company would have face to face meetings to place its securities with
investors. A company might work with an investment bank that would act as an
intermediary and underwrite the offering. Capital markets are overseen by
the Securities and Exchange Commission in the United States or other financial
regulators elsewhere. Though capital markets are generally concentrated in
M.Azmat Awan MA Eco, MBA Banking & Finance, MS Islamic Banking & Finance CP2000 SIALKOT
MONEY & CAPITAL MARKETS (8526)
financial centers around the world, most of the trades occurring within capital
markets take place through computerized electronic trading systems. Some of these
are accessible by the public and others are more tightly regulated.
2.5- Regulation of the issuance of Securities: Professional portfolio managers
are entrusted with the management of trillions of dollars. It is therefore not Page | 3
surprising that the investment industry is highly regulated to ensure a minimum
level of acceptable practice. These regulations, which often involve a complex
interaction between state and federal laws, are designed for the primary purpose of
ensuring that portfolio managers act in the best interests of their investors. At their
most basic level, regulations are written to promote adequate disclosure of
information related to the investment process and to provide various antifraud
protections. The primary purpose of these regulations and standards is to ensure
that managers deal with all investors fairly and equitably and that information
about investment performance is accurately reported.
M.Azmat Awan MA Eco, MBA Banking & Finance, MS Islamic Banking & Finance CP2000 SIALKOT
MONEY & CAPITAL MARKETS (8526)
Broker Dealer
M.Azmat Awan MA Eco, MBA Banking & Finance, MS Islamic Banking & Finance CP2000 SIALKOT
MONEY & CAPITAL MARKETS (8526)
The second reason is the opportunities for obtaining a reduced cost of funding
compared to that available in the domestic market. In the case of debt the cost will
reflect two factors:
(1)- the risk-free rate, which is accepted as the interest rate on a U.S. Treasury
security with the same maturity or some other low-risk . Page | 6
(2)- a spread to reflect the greater risks that investors perceive as being associated
with the issue or issuer.
The third reason to seek funds in foreign markets is a desire by corporate treasurers
to diversify their source of funding in order to reduce reliance on domestic
investors. In the case of equities, diversifying funding sources may encourage
foreign investors who have different perspectives of the future performance of the
corporation.
Finally, a corporation may issue a security denominated in a foreign currency as
part of its overall foreign currency management. For example, consider a U.S.
corporation that plans to build a factory in a foreign country where the construction
costs will be denominated in the foreign currency. Also assume that the
corporation plans to sell the output of the factory in the same foreign country.
Therefore, the revenue will be denominated in the foreign currency.
M.Azmat Awan MA Eco, MBA Banking & Finance, MS Islamic Banking & Finance CP2000 SIALKOT
MONEY & CAPITAL MARKETS (8526)
The capital markets consist of primary markets and secondary markets. Newly
formed (issued) securities are bought or sold in primary markets. Secondary
markets allow investors to sell securities that they hold or buy existing securities.
M.Azmat Awan MA Eco, MBA Banking & Finance, MS Islamic Banking & Finance CP2000 SIALKOT
MONEY & CAPITAL MARKETS (8526)
M.Azmat Awan MA Eco, MBA Banking & Finance, MS Islamic Banking & Finance CP2000 SIALKOT
MONEY & CAPITAL MARKETS (8526)
Weak efficiency : means that price of the security reflect the past price and trading
history of the securities. Keen investors looking for profitable companies can earn
profits by researching financial statements.
Semi-strong efficiency : means that the price of the security reflects all public
Page | 9
information which includes but is not limited to historical price and trading
patterns. Meaning that neither fundamental nor technical analysis can be used to
achieve superior gains.
Strong efficiency: exists in a market where the price of security reflects all
information whether or not it is publicly available. So successful value investors
make their money by purchasing stocks when they are undervalued and selling
them when their price rises to meet or exceed their intrinsic worth.
2.15- Transaction Costs: The costs other than the money price that are incurred
in trading goods or services. Expenses incurred when buying or selling securities.
Transaction costs include brokers' commissions and spreads (the difference
between the price the dealer paid for a security and the price the buyer pays). The
transaction costs to buyers and sellers are the payments that banks
and brokers receive for their roles in these transactions. There are also transaction
costs in buying and selling real estate. These fees include the agent's commission
and closing costs such as title search fees, appraisal fees and government fees.
Transaction costs consist of commissions, fees, execution costs and opportunity
costs.
Commissions are the fees paid to brokers to trade securities.
Fees are separated two group custodial fees and transfer fees.
Custodial fees are fees charged by an institution that hold securities in
safekeeping for an investor.
Execution costs represent the difference between the execution price of a security
and the price that would have existed in the absence of the trade.
OPPORTUNITY COSTS: The cost of not transacting represents an opportunity
cost. It may arise when a desired trade fails to be executed. This component of
costs represents the difference in performance between an investors desired
investment and the same investors actual investment after adjusting for execution
costs, commissions and fees.
These are the main sorts of transaction costs, then: search and information
costs, bargaining and decision costs, and policing and enforcement costs.
M.Azmat Awan MA Eco, MBA Banking & Finance, MS Islamic Banking & Finance CP2000 SIALKOT