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If you've ever invested in stocks in an initial public offering (IPO) or bought T-bills in a Treasury auction, you've participated in a primary market. A primary market is a market where investors buy newly created securities directly from the issuer.
If you then turned around and sold the security you'd purchased, you did so on a secondary market. We'll explain how primary markets work and how they differ from secondary markets.
A primary market is a capital market where securities are created and sold directly to investors when they're first issued. The securities can then be resold on a secondary market, like a stock exchange or the bond market. Another name for a primary market is a new issue market (NIM).
Companies issue securities when they want to raise money. They may do so through stocks, which represent partial ownership shares of the company, or bonds, which are debts that the issuer must repay with interest to investors.
When you buy securities on the primary market, you're buying directly from the issuing company or government, which sets the price through the underwriting process. But on secondary markets, transactions are made between investors, and the forces of supply and demand determine the price.
Most assets have a primary market, as well as secondary markets where they can be traded. Here are some common types of primary market issues:
A primary market is where newly created securities are sold, while a secondary market involves securities traded among investors. Let's break down the differences a bit further.
The U.S. Department of Treasury sells Treasury securities to investors on a primary market via regular auctions. Buyers can purchase Treasuries directly through TreasuryDirect.gov or through most brokerages.
The Treasury Department issues a press release before each auction that includes the security being sold, the amount of the offering, and the auction date. With the exception of savings bonds, Treasury securities can also be bought and sold on the secondary market.
