What Is a Primary Market?

Primary Market Explained in Less Than 4 Minutes

An investor opens an email about an IPO.

Tim Robberts / Getty Images

In the world of investing, the primary market is the market in which newly issued securities are traded for the first time. Most of the time, these securities are issued by a company or entity to raise capital to pay debts or fund future endeavors.

Learn more about what the primary market is, how it works, and what you need to know before getting started.

Definition and Examples of Primary Markets

Also known as the “new issues market,” the primary market is where securities are issued and sold for the first time. In this case, the issuer, which is typically either a company or government entity, decides to release the securities to the public in order to raise capital for its endeavors. These securities often come in the form of shares, bonds, or bills.

It can be helpful to think of a primary market as a new-car dealership, said Robert R. Johnson, an economics professor at Creighton University, who talked with The Balance via email.

In that scenario, when you purchase a new car, the money you’ve spent goes directly to the manufacturer. Similarly, when you buy securities on the primary market, any proceeds will go directly to the company or entity in which you’ve invested.

  • Alternate name: New issues market

How Does a Primary Market Work?

There are a few different ways investors can purchase securities on the primary market.

Initial Public Offering (IPO)/Direct Listing

An initial public offering (IPO) occurs when a private company decides to sell its shares to the public.  This step is usually taken to raise capital. However, in exchange for the opportunity to raise money, the company has to be willing to be subject to U.S. Securities and Exchange Commission (SEC) regulations and reporting requirements once it goes public.

Direct listings are an alternative to IPOs that are available on the primary market, too. A direct listing allows a company to make shares available directly to stock exchanges, providing a cheaper way to raise capital compared to an IPO.

Rights Issue

A rights issue occurs when a company allows existing shareholders to buy shares. Typically, the shares are sold at a discount from the current market rate. Also known as a “rights offering,” this method generally comes with much less red tape for the company than an IPO. However, the company also runs the risk of diluting the value of its stock by increasing the volume of its shares.

Private Placement

Private placement is another alternative to an IPO. Here, instead of raising capital by selling securities to the public, the company can choose to sell its shares to a select group of investors. Usually, these investors are high-net-worth individuals or financial firms.

Private placements are often used by startups that are not yet ready to go public, Johnson said. This method allows them to raise funds while still maintaining their status as a private company. Notably, private placements are largely unregulated.

Primary Market vs. Secondary Market

Primary Market Secondary Market
Involves investing in newly issued securities Involves investing in existing securities
Securities are sold by the company Securities are traded between investors
Issuer usually sets the price Price fluctuates based on demand and supply of the security
Less liquid since only current offerings are available for transactions Easier to buy and sell securities due to both greater availability and demand

The main difference between the primary and secondary market is what type of securities are being sold. Where the primary market focuses on “new issues,” the secondary market focuses on trading existing securities. In the secondary market, the trades happen between two investors. Trading in the secondary market offers better liquidity but more price fluctuations since the market dictates pricing rather than the issuer.

If the primary market is represented by a new-car dealership, the secondary market could take the form of a place to buy used cars from their owners. When you buy a used car, the profit from the sale goes to the car’s current owner rather than the car manufacturer. By the same token, when you buy securities on the secondary market, another investor usually profits from the sale.

What It Means for Individual Investors

Generally speaking, individual investors are much more likely to trade in the secondary market than the primary market. However, if you’re thinking about buying shares of an IPO or you’ve received an offer to take part in a rights issue, evaluate your decision based on your investment goals.

Key Takeaways

  • The primary market is where new securities are issued and sold for the first time.
  • Companies and entities usually sell securities on the primary market to raise capital.
  • The primary market is different from the secondary market, where trades of existing securities happen between investors.