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 functioning structure of financial markets.
Primary market: Issuance of new securities
In primary markets, the issuance of products is carried out and verified under certain criteria of liquidity and solvency, as well as the valuation of financial assets is produced through rating agencies.
The issue 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, in order that it can be traded on the secondary market.
We can say that the primary market is the first market filter and is essential to guarantee good control of the issued financial instrument.
Secondary market: Negotiation of previously issued securities
It is the trading market where supply and demand are most clearly expressed.
Investors bid to obtain the most competitive prices in order to maximize their profit within a certain 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 transaction and the transparency of their prices. In addition, it must require a minimum of liquidity. Since the absence 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 traded volume of the asset and its capitalization , in addition to transferring this cost to the investor and making it more difficult to obtain a profit in the operation.