Outline the main features of the primary and secondary markets for securities and explain the links between the two markets.
Distinct from the money market that are markets for short term funds, the market for equities is part of the capital market which refers to the market for long term finance. In general, the capital market can be segmented into 2 parts: the primary market and the secondary market.
A distinction can be seen from these two types of financial market. A primary market is a financial market, which can be categorized as those dealing with financial claims that are newly issued. And those markets for exchanging existing financial claims previously issued are called secondary markets. But the distinction is still not clear sometimes since new capital can be raised by a stock exchange and existing securities sold on the same market. Anyhow, the existence of a secondary market is necessary to support the primary market as it is essential for a long term capital market that there exists a market where those long term claims can be sold if the holder needs to obtain liquidity.
Main features of primary markets for securities
A primary market is a market which deals in new issues of loanable funds. It involves the underwriting of new common stocks or bonds sold to investors by investment banking firms. Transactions that take place in primary markets only create or extinguish financial claims. The creation of new loan causes the transfer of cash from a lender to a borrower in exchange for a financial claim and the claim is to be extinguished when the repayment takes place. The participants of primary markets should be able to do business with each other at low cost.
The main methods for raising long term finance in recent...