The capital market can broadly be divided into the primary market and secondary market.
Primary Market
The primary market is the part of the financial market where new securities such as shares, bonds, and debentures are issued and sold to investors for the first time.
In this market, the securities are issued directly by companies, governments, or other eligible organisations to raise new funds for business expansion, development projects or other financial needs. The money paid by investors goes directly to the organisation that issued the securities.
For example, when a company offers new shares to the public to raise money for expansion, the transaction takes place in the primary market.
Functions of the Primary Market
1. Helps companies raise new capital
The primary market enables companies to obtain fresh funds by issuing new shares, bonds, debentures and other securities to investors.
The money raised can be used to start new projects, expand existing businesses, purchase equipment, build factories or meet other long-term financial needs.
For example, a company that wants to establish a new manufacturing plant can issue shares to the public and use the money raised to finance the project.
2. Helps government raise funds
The primary market provides government with an avenue to raise money for financing development projects and other public expenditure.
Government can issue bonds and other securities to investors, who provide funds in exchange for interest and repayment according to the terms of the security. The funds raised may be used for projects such as roads, schools, hospitals and other infrastructure.
3. Provides new investment opportunities
The primary market gives individuals and institutions the opportunity to invest in newly issued securities. Investors can purchase shares, bonds and other securities directly when they are first offered.
This allows people with surplus funds to put their money into investments that may generate dividends, interest or capital gains.
4. Channels savings into productive investment
The primary market helps transfer money from people and institutions with surplus funds to businesses and governments that need long-term finance.
Instead of leaving savings idle, investors can purchase newly issued securities, while the issuers use the funds for productive activities. This process helps turn savings into investment and supports economic activity.
5. Promotes business expansion and economic development
By making long-term finance available to companies and other eligible organisations, the primary market supports business expansion and the development of productive activities.
Companies can use funds raised through new securities to increase production, employ more workers, acquire technology and enter new markets. In this way, activities in the primary market can contribute to employment creation, increased production and overall economic development.
Secondary Market
The secondary market is a part of the financial market where securities that have already been issued are bought and sold among investors.
In this market, the original issuer of the security, such as a company or government, does not normally receive the money from the sale. Instead, the money is paid by the new buyer to the investor who is selling the security.
The secondary market therefore provides investors with an opportunity to convert their investments into cash and makes securities easier to buy and sell.
A common example is the buying and selling of shares on a stock exchange.
Functions of the Secondary Market
1. Provides Liquidity to Investors
The secondary market provides investors with an opportunity to convert their securities into cash by selling them to other investors.
For example, a person who owns shares in a company can sell those shares when they need money instead of waiting until the company closes down. This makes investments more attractive because investors know that they can sell their securities when necessary.
Liquidity therefore means the ease with which an investment can be converted into cash without significant difficulty.
2. Makes It Easier to Buy and Sell Securities
The secondary market provides an organised platform where existing securities can be bought and sold. Investors who want to sell their shares can meet other investors who want to buy them through the market.
In an organised exchange, brokers and other market participants help facilitate these transactions. This makes the process of transferring ownership of securities easier and more efficient.
Also Read: The Main Economic Effects of Taxation on the Economy
3. Helps Determine Market Prices.
The secondary market helps determine the current prices of securities through the forces of demand and supply.
When many investors want to buy a particular share, its price may rise, while a high number of sellers and fewer buyers may cause its price to fall.
The prices observed in the market therefore provide information about how investors currently value particular securities. These prices can also help investors make decisions about buying or selling.
4. Encourages Investment
The existence of a secondary market encourages people to invest in shares, bonds and other securities because they know that they can sell their investments later.
Without a secondary market, an investor might have difficulty finding someone willing to buy an existing security.
The ability to resell securities gives investors greater flexibility and confidence when committing their savings to investments. As a result, more savings can potentially be channelled into productive economic activities.
5. Provides a Continuous Market for Existing Securities
The secondary market provides an ongoing marketplace for securities that have already been issued. After a company or government raises funds by issuing securities in the primary market, those securities can continue to be traded among investors in the secondary market.
This means that the original investors do not have to remain owners until the security matures or the company is dissolved. The continuous trading of securities also keeps the financial market active and provides investors with regular opportunities to adjust their investments.
Summary
The primary market is where new securities are issued and sold for the first time.
The money raised goes to the organisation issuing the security.
It helps companies and governments raise new capital.
Example: A company issuing new shares to investors.
The secondary market is where existing securities are bought and sold.
The money normally goes from the new buyer to the investor selling the security.
It provides liquidity to investors.
It helps determine the market price of securities.
Example: An investor selling previously purchased shares through the stock market.
Also Read: Features of Treasury Bonds as Types of Securities
