Explain two major differences between the primary market and the secondary market in India.
Answer
In the primary market securities are issued for the first time and funds go to the issuing company; in the secondary market securities are traded among investors and funds change hands between investors, not the issuer.
Step-by-step solution
- Define the primary market: it is where new securities are issued to the public for the first time.
- State that the proceeds of the issue are received by the issuing company or government.
- Define the secondary market: it is where existing securities are bought and sold among investors.
- Explain that in the secondary market the issuing company does not receive any funds; only investors exchange money among themselves.
- Summarise the two key distinctions: source of securities and flow of funds.
Common mistake: Thinking the issuing company receives money in the secondary market
Concept tested: Primary vs secondary market
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