What is the difference between a primary market and a secondary market?

The primary market is defined as the marketplace where new securities are issued and sold for the first time. This is where companies or governments create and offer new stocks or bonds to investors to raise capital. For example, when a company conducts an initial public offering (IPO), it is operating in the primary market to sell shares directly to investors for the first time.

In contrast, the secondary market is where these existing securities are bought and sold among investors after they have been issued in the primary market. In this market, previously issued stocks and bonds are traded, and the company that originally issued the securities does not directly benefit from these transactions.

This distinction is crucial because the primary market facilitates the initial capital raising for entities, while the secondary market allows for liquidity and price discovery of those securities among investors. Understanding these markets is fundamental in economics and personal finance, as they influence investment strategies and market dynamics.