How to understand the primary and secondary market?

the primary market and secondary market

How to understand the primary and secondary market?

Types of Capital Markets: There are many investment instruments where people are more familiar with physical commodities like property or gold. However, only a few are aware of investment options through the capital market.

 the primary market and secondary market
the primary market and secondary market

Investing in the capital market or using the capital market is not just giving the public an opportunity to make a profit. However, it also has an active role in improving the economic conditions in the country.

Capital markets are an activity related to public offerings and securities trading, public companies related to the protection they issue, and institutions and professions related to securities.

The capital market serves as a liaison between investors, companies, and government agencies through long-term trading of instruments such as stocks, bonds, and others.

types of capital markets

There are several types of capital markets. Based on the time of transactions, the capital market is divided into the primary and secondary markets.

Primary Market 

The primary market is where all securities or securities are publicly traded for the first time before being listed on the stock exchange. The introductory market period is when shares or other securities are first offered to investors (investors) by the underwriters.

Offers are made through securities brokers (broker-dealers) who act as agents selling the stock. This process is commonly known as Initial Public Offering (IPO).

Another popular term for the primary market is going public. The share price is fixed in the primary market. This is because the company determines the price and number of shares before offering them in the primary market. Because the number of shares offered by a company is limited, it is not confident that all investors will receive the amount they seek.

Investors get fewer shares than ordered or none, especially if there is significant over-subscription.

For example, shares offered to the public through the primary market total 100 million shares. Meanwhile, the number of requests to buy shares from all investors stood at 150 million. Because it is oversubscribed (excess demand), investors can purchase these shares in the secondary market.

Then, if investors receive fewer shares than the number ordered, the company will make a refund with the excess money. Buying shares in the primary market has a unique appeal because of the potential for capital gains once the claims go public.

Characteristics of Primary Market

The issuer (securities issuer) sells shares to the public through an underwriter intermediary.

  • The price offered is as per the agreement of both parties.
  • Transaction charges are not charged from the buyers of the securities.
  • If there is an over-subscription (demand for shares exceeds supply), the buyer may not receive the number of securities that are necessarily ordered.
  • Investors buy shares (securities) through designated underwriters.

limited order period

Public accountants, notaries, legal advisors and valuation companies are usually involved in the offer to sell shares.

The primary market is also often called the primary market (primary market) or the first market (first market).

The buying and selling of securities in the secondary market are not transacted between investors and companies but between one investor and another investor. Once listed on the stock exchange, the public can freely transact the company’s shares.

For example, investors who already have shares transacted in the primary market will typically sell these shares in the secondary market to realize capital gains. Examples of transactions in the secondary market are stock transactions which we often use online stock trading applications. Secondary market transactions are daily stock trading activities.

secondary market

The secondary market is a continuation of the primary market. Simply put, a secondary market is where all the securities listed on the stock exchange are traded. The secondary market allows investors to sell or buy all securities listed on the business after an initial public offering (IPO) has been made. The buying and selling of protection in the secondary market are no longer happening between investors and companies.

But between one investor and another investor. Once listed on the stock exchange, the public can freely transact the company’s shares. For example, investors who already own shares due to transactions in the primary market will typically sell these shares in the secondary market to realize capital gains.

Transactions up to cash withdrawals at ATMs are examples of transactions in the secondary market, where we often do stock transactions using online stock trading applications. We can say that secondary market transactions are daily stock trading activities.

Difference Between the Primary Market and Secondary Market

The primary and secondary markets are similar because they are a place to buy and sell shares or securities on a stock exchange. However, there are many differences between the primary and secondary markets. Here’s the difference:

The price of shares in the primary market is relatively stable, per the issuer’s agreement with the underwriter, while the cost of claims in the secondary market may fluctuate due to the demand and supply of these shares.

  • There are no transaction fees in the primary market, unlike in the secondary market, there are buying and selling transaction fees that are charged to investors.
  • There is a time limit for ordering shares on the primary market, while there is no time limit for ordering shares on the secondary market.
  • The transaction activities in the primary market are only for the purchase of shares, whereas in the secondary market, the transactions are opened for the sale and purchase of shares.
  • Orders for shares in the primary market are placed through intermediary selling agents, while orders for shares in the secondary market are placed through members of the stock exchange.
  • The money from the sale of shares in the primary market will go to the issuer (issuer), while the money from the deal in the secondary market will go to the seller of the securities.

Capital markets as a means of raising capital for businesses

Companies can get money by selling shares in the capital market. The general public would later buy these shares, other companies, institutions or the government.

the capital market as a means of equitable distribution of income

After a certain period, all shares purchased will entitle the buyers or owners to a percentage of the company’s profits (dividends). Therefore, selling shares through the capital market means equalizing income.

The capital market as a means of increasing production capacity

The company’s productivity will also increase by getting capital from the capital market.

the capital market as a means of employment generation

The existence of capital markets can encourage the emergence and development of other industries, which in turn has the effect of creating new jobs.

The capital market as a means of increasing state income

Every dividend distributed to the shareholders will be taxed by the government, and the additional income through this tax will increase the revenue of the state.

The capital market as an indicator of the country’s economy

The selling or buying activity and volume in the capital market, which also increased solidly, indicated that the business activities of various companies were going well and vice versa.

capital market investment instruments

The capital market is also often referred to as the stock exchange. In it, you can find out the different types of securities that are traded every day. Such securities include:

1. Stocks

Shares are securities that are proof of ownership of a company. Investors who have shares in the company have the right to share profits or receive dividends.

2. Mutual Fund

Mutual Fund is known as an investment vehicle which is a place to pool and manage money from several investors. Investment managers then collect these funds using various instruments such as money markets, bonds, stocks or other securities.

3. Loan or Bond

You can also get securities in the form of bonds in the capital market. It can transfer the ownership of debt securities, and the holder has the right to receive interest and repayment of the loan over a predetermined period.

4. Exchange Traded Fund (ETF)

These securities have similarities with mutual funds in that both are aggregated collectively. It’s just that EFT can be traded like a stock on a stock exchange.

5. Derivatives

In addition, there are also securities in the form of derivatives. These securities are known as derivative forms of shares. There are two types of products, warrants and rights.

capital market returns

Capital markets have benefits for issuers, i.e. the parties to a public offering, i.e. securities offer issued by issuers to sell securities to the public based on regulated procedures following applicable laws and regulations, and investors.

Capital market benefits for issuers:

  • The amount of money that can be raised is large.
  • Funds can be accessed in one go when the primary market closes
  • No treaties so management can have more freedom in managing money and company
  • The solvency of the company is high so that it can improve the image of the company
  • The issuer’s dependence on the bank is reduced

capital market benefits for investors

Investment value develops following economic growth. The rise can see in this increase in the prices of stocks that have received capital gains.

Receive dividends for those who own shares or even floating interest for bondholders

Invest in multiple instruments at once and hedge your risk

Bonds as a profitable investment product

If you intend to invest in the market, consider Bonds as the best investment product. Bonds do not have the popularity of stocks as an investment product, but bonds can be used as a gateway for you to start investing that can grow your income while it is Still productive at work.

As an introduction, a bond is an investment product that can be found in the capital market. Bonds are in the form of debt statements issued by related parties, usually from governments or corporations, but can also be given by individuals. As the best investment product, bonds can be applied to long-term and short-term investments, as they generally have a maturity period of 1 to 10 years.

Bond investment holders will typically be given an indication of ownership in the form of interest or coupons. If you choose bonds issued by corporations or the government, you’ll usually get coupons that are given out periodically. This is proof or a token of the profit you get from investing in the coupon bond. The advantage of having a steady income makes bonds one of the best investment products you can have.

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