Difference Between Primary and Secondary Market

The main difference between a primary market and a secondary market is that the former is where financial assets are issued and the latter is where previously issued financial assets are traded and exchanged .

Both are necessary in the structure of the functioning of the financial markets .

Primary market: Issuance of new titles

In the primary markets, the issuance of products is carried out and verified under certain liquidity and solvency criteria , as well as the valuation of financial assets through rating agencies .

The issuance is carried out by defining the characteristics of the product to be issued and its placement is carried out through authorized issuing agencies that have a certain reputation in the market, so that it can be traded in the secondary market.

We can say that the primary market is the first market filter and is essential to ensure good control of the financial instrument issued.

Secondary Market: Trading of Previously Issued Securities

It is the negotiation market where supply and demand are most clearly expressed .

Investors bid for the most competitive prices in order to maximize their profit over a given time horizon.

In this market, participants already have information about the characteristics of the product and can safely decide whether to buy or sell the financial asset in question.

This trading segment must respect the anonymity of the parties involved in the operation and the transparency of their prices. In addition, you must require a minimum of liquidity. Since the lack of liquidity causes the cost of operations to be higher since the difference between the purchase price and the sale price, in some cases, is very high and directly affects the volume of the asset traded and its capitalization , in addition to transferring this cost to the investor and making it more difficult to obtain a profit in the operation.