What is the main difference between a primary market and a secondary market?

The primary market is where new securities are created and offered to investors for the first time. This is the stage in the capital formation process where companies raise capital by issuing stocks or bonds directly to the public or through underwriters. In this market, the proceeds from the sale of the securities go directly to the issuing company, which uses the funds for various purposes such as expansion, debt reduction, or research and development.

On the other hand, the secondary market is where previously issued securities are bought and sold among investors. In this market, the issuing company does not receive any proceeds from the transactions. Instead, the secondary market provides liquidity to investors, allowing them to buy and sell securities they already own. This market includes exchanges like the New York Stock Exchange and electronic trading platforms, where investors can exchange stocks, bonds, and other securities.

The distinction between these two markets is fundamental to understanding how securities are traded and how capital flows within the economy. While the primary market focuses on new issuance and capital raising, the secondary market emphasizes the trading and valuation of existing securities.