PRIMARY MARKET VS.
SECONDARY MARKET
These two types of financial market is based on the type of market it is being traded.
Illustration 2. Primary and Secondary Market
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Primary Market
Type of financial market wherein fund demanders raise funds through new issuances of
financial instruments.
Examples: Internally generated funds are not enough, demanders need to raise
additional funds in the primary market to fully finance project.
New issuances of financial instruments are sold to original fund providers, which is the
household, in exchange for money that fund demanders need. It also includes additional
debt or equity securities of an already publicly traded company.
Non-negotiable instruments are only traded in the primary market, such as
Mortgage loans
Savings deposit
Life policies
- Usually, primary market transactions are coursed through investments banks.
Investment Banks
They provide advice to issuers on matters related to prices of
securities, transactions cost, and the number of securities to be
issued based on their fund needs.
Provide advice on how to present information to attract
potential investors to the securities issuance.
It is responsible to all aspects to ensure proper execution of the
issuance.
They also underwrite securities.
- Four Types of Issue Method
Public Offering
- Occurs when securities are offered to the general public. It is done by issuing
a prospectus or placing document which contains an offer to the general
public to subscribe or purchase securities at a stated price.
- Private companies who will sell shares for the very first time is said to
undergo Initial Public Offering (IPO), thru the help of investment banks.
- It could be an:
Offer for subscription where the general public is invited to subscribe
to unissued shares of the company.
Offer for sale where existing shareholders invite potential subscribers
to buy portion of the shares they own.
- Underwriter is appointed for public offerings. An underwriter provides an
undertaking to purchase remaining securities if the offer will not be fully
subscribed by the public.
Private Placement (Limited Public Offer)
- Occurs when the issuer looks for a single investor, an institutional buyer or
group of buyers to purchase the whole securities issuance instead of offering it
to the general public.
- Traditionally, securities are illiquid and are not easily converted into cash.
- Underwriter subscribes the whole security at a certain price and sells it to
group of investors at a higher price. The difference is known as the
underwriting spread.
Auction
- Usually used for issuance of treasury bills, bonds, and other securities
issued by the government and are commonly executed exclusively with
market makers.
- It can be done through three methods:
Dutch Auction- Seller begins with a high price and it will be
lowered down to specific intervals until the buyer agrees to
purchase the instrument.
