Question

(a) Differentiate between 'Primary Market' and 'Secondary Market' on any three basis.

Accepted Answer

Differences between primary market and secondary market: S.No. Primary market Secondary market 1 There is sale of securities by new companies or further (new issues of securities by existing companies to investors). There is trading of existing shares only. 2 Securities are sold by the company to the investor directly (or through an intermediary). Ownership of existing securities is exchanged between investors. The company is not involved at all. 3 The flow of funds is from savers to investors, i.e. the primary market directly promotes capital formation Enhances encashability (liquidity) of shares, i.e. the secondary market indirectly promotes capital formation 4 Only buying of securities takes place in the primary market, securities cannot be sold there Both the buying and the selling of securities can take place on the stock exchange 5 Prices are determined and decided by the management of the company Prices are determined by demand and supply for the securities 6 There is no fixed geographical location. Located at specified places BASIS CAPITAL MARKET MONEY MARKET Duration The Capital Market deals in medium and long term securities such as equity shares and debentures. Money market instruments have a maximum tenure of one year and may even be issued for a single day. Liquidity Capital market securities are comparatively less liquid. Money market securities are comparatively more liquid. Safety Capital market securities generally yield a higher return than money market instruments. Money market securities yield comparatively less return. further (new issues of securities by existing companies to investors). directly (or between investors. The company is not involved through an intermediary).

Marking-scheme solution

More from Financial Markets

S.No.	Primary market	Secondary market
$\displaystyle 1$	There is sale of securities by new companies or further (new issues of securities by existing companies to investors).	There is trading of existing shares only.
$\displaystyle 2$	Securities are sold by the company to the investor directly (or through an intermediary).	Ownership of existing securities is exchanged between investors. The company is not involved at all.
$\displaystyle 3$	The flow of funds is from savers to investors, i.e. the primary market directly promotes capital formation	Enhances encashability (liquidity) of shares, i.e. the secondary market indirectly promotes capital formation
$\displaystyle 4$	Only buying of securities takes place in the primary market, securities cannot be sold there	Both the buying and the selling of securities can take place on the stock exchange
$\displaystyle 5$	Prices are determined and decided by the management of the company	Prices are determined by demand and supply for the securities
$\displaystyle 6$	There is no fixed geographical location.	Located at specified places
BASIS	CAPITAL MARKET	MONEY MARKET
Duration	The Capital Market deals in medium and long term securities such as equity shares and debentures.	Money market instruments have a maximum tenure of one year and may even be issued for a single day.
Liquidity	Capital market securities are comparatively less liquid.	Money market securities are comparatively more liquid.
Safety	Capital market securities generally yield a higher return than money market instruments.	Money market securities yield comparatively less return.