The institutions that provide the resource exchange between entrepreneurs who need resources and investors, the investment and financing instruments – as well as the structure that consists of the rules that regulate them – are called financial markets. Investments in financial markets involve the risk of loss of money due to the uncertainty of future events. Apart from the risk of not returning the principal, there are also risks that affect the price of the investment instrument such as interest rate risk, foreign exchange risk and so on. In general, the higher the expected return, the higher the risk.
Financial markets, money market and capital market.
The currency market is short-term. Maturities in money markets usually do not exceed a year. Tools of money market are: money, foreign exchange, repo-reverse repo and securities with a maturity of up to one year. The capital market consists mainly of medium and long-term instruments. The maturity is generally more than a year. The capital market instruments are securities such as stocks, bonds, treasury bills, and financing bonds.
Primary Market-Secondary Market
- The primary market, also called the new issue market, facilitates the creation and sale of new securities. Transactions in the primary market often involve the purchase of a direct public offering (IPO – Initial Public Offering) from an issuer. When a company decides to open to the public and proposes shareholding to its partners, the first step is to sell its shares through primary market transactions. A share will set the initial price per share for the issuance of a new security and only a select group of individual and institutional investors will have access to the IPO. The primary market facilitates private settlement transactions and a rights issue when a company needs additional capital increases.
- The secondary market allows daily investors to buy shares that were previously issued on the primary market. While the primary market contains purchases directly to the issuer’s buyer, the secondary market facilitates sales without the direct participation of the issuing company. Secondary market transactions occur on a stock exchange such as the New York Stock Exchange (NYSE). As prices fluctuate based on supply and demand policies, secondary market operations are often more costly than primary market sales.
Financial Markets: difference between primary and secondary markets
The difference between the primary capital market and the secondary capital market is that it does not participate in the primary market where it purchases the investors’ securities directly from the issuing company; while the security company trades securities of the investors in the secondary market.
When a company first sells new stocks and treasuries to the public, it does so in the primary capital market. In most cases, this takes the form of an IPO. When investors buy securities in the primary capital market, the company that issued the securities has already leased an underwriting firm to create a prospectus to monitor the bid and to show the price and other details of the securities to be issued. Companies issuing securities through the primary capital market will borrow investment bankers from large institutional investors to get their commitments to buy securities when first acquired.
On the secondary market, securities are traded after selling all the shares and treasuries offered on the primary market. New York Stock Exchange (NYSE), London Stock Exchange or Nasdaq are some examples of secondary markets. On the secondary market, small investors have a better chance of buying and selling securities because they are no longer offered to the public because of the small amount of money they show. Everyone can buy securities in the secondary market as long as they want to pay the price of the trade of the securities. On the secondary market, an investor asks for a broker to buy securities on his behalf. The security price fluctuates with the market and the cost of the investor includes the commission paid by the commissioner. The volume of securities available for sale varies from day to day, and security demand fluctuates. The price paid by the investor is not directly linked to the initial price of the security determined by the initial issue, and the security company is not involved in any sales between the two investors. However, the company can buy back a share in the secondary market.
Written by Gönül Gülce Işık