Primary and Secondary Markets

Simply put, the primary market is the market for “new” securities, and the secondary market is the market

for “used” securities. Think of the primary market as equivalent to the sale of new cars and the secondary

market as equivalent to the sale of used cars. In practice, many market locales trade both new and used

securities. For example, the stock markets trade equity securities daily, and most of the trading takes place

among individual and institutional investors who own shares in publicly traded companies. Trading a share of

Amazon, Facebook, or Nike stock has little impact and no direct cash flow to the underlying firm. However, the

information provided by such transactions is valuable, as it is a costly and public real-time statement by

investors of their perceptions of firm’s value and a reflection of satisfaction and expectations.

Some, though many fewer, transactions in the equity market are for the purchase and sale of new securities.

Firms issue new shares of stock called seasoned equity offerings (SEOs) or initial public offerings (IPOs) into

the market. These are issues of new shares of stock, previously untraded, and their issuance sends cash flows

directly to the underlying firms. SEOs are new shares issued by established firms, and IPOs are new shares

issued by firms going public for the very first time. Once the initial transaction takes place, purchasers of these

new securities may trade them. However, the second and subsequent trades are secondary, not primary,

market transactions.

Extensive primary market transactions take place weekly, when the Treasury Department auctions billions of

dollars of new Treasury securities. These new securities repay maturing Treasury securities and provide for the

ongoing liquidity and long-term borrowing needs of the federal government. Again, subsequent trading of

this government debt occurs as secondary market transactions.