Money and Capital Market Analysis: Primary, Secondary Market Analysis

This report provides a detailed analysis of money and capital markets, emphasizing the distinctions between primary and secondary markets. It explores how these markets function, including the issuance of new securities in the primary market, such as IPOs, and the trading of existing securities in the secondary market. The report highlights the importance of both markets for financial system development, investment, and economic growth. It also covers the different types of offerings, such as public issues, private placements, and preferential allotments. The report provides insights into the roles of different market participants, including investors, issuers, and underwriters, and discusses the significance of liquidity and price discovery in the secondary market. The conclusion stresses the critical role of both markets in fostering long-term growth and investment within the finance sector.

Running head: MONEY AND CAPITAL MARKET ANALYSIS
Money and Capital Market Analysis
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1MONEY AND CAPITAL MARKET ANALYSIS
1. Introduction
Financial market is a world where all the new securities are issues to the public daily
of different financial products and services that are tailored to the need of each and every
individual from all the income brackets (Pilbeam, 2018). These type of financial products are
bought and sold in the capital market, which is again divided into Primary and Secondary
market. This paper shall elaborate on discussing about the differences between the primary
and secondary markets. It shall further explain on the vitality of these markets to be well-
developed within financial systems.
2. Discussion
2.1. Difference between Primary and secondary markets
Prior to investing the money in the financial asset such as debentures, bonds, shares
and commodities, it is necessary to be well aware of the differences in between the primary
and the secondary markets in order to better use his or her savings. It is to note that the
primary and secondary markets are the two parts of Capital market. Capital market refers to
the part of a financial system that raises capital from the shares, bonds, or any other types of
investments (Sornette, 2017).
Figure 1: Process of investment in Primary Markets

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Figure 2: Process of investment in Secondary Markets
According to Ehrhardt and Brigham (2016), primary markets are the markets where
the securities are formed. Within this market, the companies float new stocks to public. IPO
(Initial Public Offering) is one of the examples of primary markets. It is to note that an IPO
takes place when a non-government firm issues its stocks to public for the first time.
Different forms of issues that are produced by the corporation are referred to as Public issue,
Issue of IDR, Offer for Sale, Right Issue etc. The firms that bring the IPO are known as
issuers and this process is called public issue (Chaplinsky, Hanley & Moon, 2017). It
included several investment bands and the underwriters by means of which the shares, bonds
and debentures could be directly sold to investors. For example, if a company hires a total of
four underwriting firms for determining the financial details of its IPO, it is then detailed by
the underwriters about the stock price to be 20 dollars. It is when the investors can purchase
them the IPO at the rate that is directly gained from issuing the firm. It is the very first chance
that the investors need to aid capital to a firm by means of purchasing its stock. It is also to
note that the equity capital of the company is composed of the funds that are formed by the
sale of stock in primary market.
On the contrary, the secondary markets are often called as stock market. The
securities are first offered in primary markets to the general public for the subscription where
a firm gains money from its investors and then in turn, the investors get final securities. After

3MONEY AND CAPITAL MARKET ANALYSIS
then, these investors are categorised as one among the stock exchange for trading. It includes
NASDAQ, NYSE and other all significant exchanges present in the world (Agarwal, 2017).
According to Vernon (2017), one of the defining characteristics of the secondary market is
that the investors trade among themselves. Within this market, the existing debentures,
treasury bills, bonds, shares, commercial papers etc. of the corporates are traded among the
different investors. One of the best example to consider while explaining what is secondary
market and how it is different from the primary one is that of when people go to buy Amazon
stock. It is when they deal only with the another investor while buying AMZM stock, who
owns that shares in Amazon but Amazon does not involve directly with the transactions that
take place.
With the same, it is also to note that the primary market transactions is related to the
formation of the new financial asset. For instance, a firm issues its new shares or the
government of a country issues the Treasury bonds or raising of new funds. All these are
examples of primary markets. On the other hand, the secondary market transactions are
related to the transferring and sales of the prevailing financial assets like for example, a
shareholder sells its shares to any other investor and receives the value i.e., the transfer of the
ownership. Moreover, on one hand where the primary market provides avenues for selling the
new securities, on the other, the secondary market deals in securities that the companies
already issued (Bryan, Rafferty & Wigan, 2017). Primary market is where direct type of
purchasing is practised but in the secondary market, indirect type of purchasing is done. The
primary market helps to supply the funds to budding enterprises and at the same time, also to
the existing firms for diversification and expansion. Whereas, the secondary market does not
provide any funding to the enterprises. Also, in the primary market, the securities can be sold
only once but in the secondary market, they can be sold multiple times (Kidwell et al., 2016).
Buying and selling are conducted in between the investors and companies in the primary

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market but it is only in between the investors in the secondary market. It is also to mention in
this context that in the primary markets, it does not provide liquidity for the stocks. On the
other hand, secondary markets provides liquidity of the stocks.
2.2. Importance of Primary and Secondary markets to be well-developed within the
financial system
Finance involves the management and acquisition of all the financial resources
including the capital that is raised through the financial markets. The initial stock offerings of
a company raises funds for financing its expansion and future growth (Gitman, Juchau &
Flanagan, 2015). Well-developed primary and secondary markets are very important within
the financial system. The primary market is the place where the companies form securities. It
is in this market that the companies float the new bonds and stocks to the common public. It
is the very first opportunity where the investors can contribute capital to a particular firm by
means of purchasing its stock. The equity capital of a company is composed of the funds that
are developed by the stock that are sold on the primary market (Wilson, Wright & Kacer,
2018). The rights offering allows the firms to raise the additional equity by means of the
primary market after the securities get entry into secondary market. One of the other types of
offerings for the stocks is that of the private placement and the preferential allotment. It is to
note that the private placements allows the firms to sell their stocks directly to the significant
investors like the banks or the hedge funds without even making the shares available
publicly. It is to mention that on one hand where the preferential allotment offers the shares
to the selected investors at a special price that are not provided to general publics. In the same
way, the governments and the businesses who want to gather the debt capital could select to
issue the new long and short term bonds and stocks on the primary market. The new bonds
and stocks are issues with the rates of coupon which correspond to the present rates of
interest during issuing and this may be either lower or higher than the pre-existing bonds.

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On the other hand, for purchasing the equities, secondary market is considered to be
as the “stock market. The investors within the secondary market start to trade all the earlierly
issued securities in absence of issuing the involvement of the companies. Example to
consider while explaining what is secondary market and how it is different from the primary
one is that of when people go to buy Amazon stock. It is when they deal only with the
investor while buying AMZM stock, who owes that share in Amazon but Amazon does not
get directly involved with the transactions that take place. In the debt markets, when bonds
are guaranteed for paying its owner the complete par value at the time of maturity, the date is
often several years down the road (Bruche & Segura, 2017). Instead of doing this, the
bondholders can also sell the bonds on the secondary market for a tidy profit if the rates of
interest have decreased ever since the time of issuing the bond and this makes it more
valuable to the other investors because of its relatively higher rate of coupon. This market can
further be broken into dealer and auction market. In the auction market, every person and the
insinuations who seek for trading the securities congregate in a single area and announce of
the prices at which they want to sell and buy their stocks. It is also sometimes refer to as bid
and ask prices. The main idea behind this is that an effective market must prevail by bringing
together all the parties and having them publicly declaring the prices. On the other hand, the
dealer market does not need any party to converge in central location. Instead, the
participants who are there in the market are joined by means of electronic networks. It is the
dealer who hold an inventory of the security and stand ready for buying and selling with the
market participants. Dealers earn profits my means of spreading in between the prices at
which they sell and buy the securities. One of the best example to consider in this regard is
that of a dealer market in NASDAQ. It is to note that in NASDAQ, the dealers or the market
makers, provide the company bid and ask prices at which they willingly purchase and sell a

6MONEY AND CAPITAL MARKET ANALYSIS
security. The main idea behind this that the competition in between the dealers would give
the best possible price for the investors.
The primary market transactions is related to the creation of the new financial asset.
For example, a firm issues its new shares or the government of a country issues the Treasury
bonds or raising of new funds (Porter & Kramer, 2019). All these are examples of primary
markets. Also, the secondary market transactions are related to the transferring and sales of
the prevailing financial assets like for example, a shareholder sells its shares to any other
investor and receives the value i.e., the transfer of the ownership. Well-developed primary
and secondary markets are therefore necessary. It is to note that the primary market
transactions helps in providing funds for the business development and this further helps in
ensuring economic growth. The investors are likely to purchase the primary market securities
of they become aware of the fact that there is a deep and liquid secondary market in which
they are able to sell their bought securities in the future whenever necessary. Moreover, the
secondary transactions provide the price discovery in which the securities would be sold at
the present value of market.
3. Conclusion
Hence, from the above analysis it is to conclude that both primary and secondary
markets play an important role in finance. Knowing how these two markets work is the key to
get an idea of how the bonds, stocks and the other securities trade. In absence of them, the
capital markets would be even more difficult for navigating and would have been very less
profitable. The original issues sell the stocks and make their initial public offerings on the
primary market. Selling of stock and subsequent trading after this initial public offering take
place on the secondary markets. Both the primary and the secondary markets are critical to
finance, particularly for its long term growth and investment.

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4. References
Agrawal, G. (2017). Global Financial Markets Integration: A Comparative Study Between
Developed and Emerging Economies. In International Business Strategy (pp. 277-
299). Palgrave Macmillan, London.
Bruche, M., & Segura, A. (2017). Debt maturity and the liquidity of secondary debt
markets. Journal of Financial Economics, 124(3), 599-613.
Bryan, D., Rafferty, M., & Wigan, D. (2017). Capital unchained: finance, intangible assets
and the double life of capital in the offshore world. Review of International Political
Economy, 24(1), 56-86.
Chaplinsky, S., Hanley, K. W., & Moon, S. K. (2017). The JOBS Act and the costs of going
public. Journal of Accounting Research, 55(4), 795-836.
Ehrhardt, M. C., & Brigham, E. F. (2016). Corporate finance: A focused approach. Cengage
learning.
Gitman, L. J., Juchau, R., & Flanagan, J. (2015). Principles of managerial finance. Pearson
Higher Education AU.
Kidwell, D. S., Blackwell, D. W., Sias, R. W., & Whidbee, D. A. (2016). Financial
institutions, markets, and money. John Wiley & Sons.
Pilbeam, K. (2018). Finance & financial markets. Macmillan International Higher Education.
Porter, M. E., & Kramer, M. R. (2019). Creating shared value. In Managing sustainable
business (pp. 323-346). Springer, Dordrecht.
Sornette, D. (2017). Why stock markets crash: critical events in complex financial
systems (Vol. 49). Princeton University Press.

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Vernon, R. (2017). International investment and international trade in the product cycle.
In International Business (pp. 99-116). Routledge.
Wilson, N., Wright, M., & Kacer, M. (2018). The equity gap and knowledge-based
firms. Journal of Corporate Finance, 50, 626-649.