What is the difference between "primary" and "secondary" markets?

The distinction between primary and secondary markets is fundamental in understanding how financial markets operate. In primary markets, securities are created and issued for the first time. This is where companies, governments, or other entities raise capital by selling new stocks or bonds to investors. Investors purchase these securities directly from the issuer, which means the funds go directly to the organization seeking to raise capital.

On the other hand, secondary markets involve the trading of already existing securities. In this market, investors buy and sell securities amongst themselves after the initial issuance. The issuer of the securities does not receive any funds from transactions in the secondary market; instead, the transaction occurs directly between buyers and sellers.

This separation clearly defines how primary markets focus on new issues and capital formation, while secondary markets provide liquidity and trading opportunities for existing securities. Understanding this dynamic is crucial for anyone involved in the finance and investment sectors.