Primary & Secondary Markets: Crucial Role in Stock Market - Essay Sample

Introduction

Primary and secondary markets play a crucial role in the stock market. Both markets are interdependent and function together. Primary markets are the markets where securities are created. On the other hand, secondary markets deal with the trading of the already created securities. The primary market essentially provides the channel for the creation of new securities. To raise money for investment, the issuer sells these securities in the primary market (Andriansyah, 2017). In simple terms, the primary market is the segment of the capital market, where companies or financial institutions mobilize capital by issuing securities (Andriansyah,2017). The resources mobilized are used to finance both existing and new projects through upgrading and modernization (Kakarot-Handtke,2012). The following methods are used by companies during the issue of securities; bonus issue, initial public offerings, the issuing of rights to existing shareholders, public offers, and on firm allotment basis.

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On the other hand, secondary markets are where the majority of stock trading is done. This is mainly because securities are traded in the secondary market after their initial offer in the primary market (Kakarot-Handtke,2012). The secondary market mechanics of operation involves enabling investors to adjust their holdings after considering the changes in the assessment of risk and return (Broner et al., 2010). In the secondary market, investors sell securities to other investors. The secondary market also plays a crucial role in the valuation of securities by considering demand and supply, provision of regulations, and offer liquidity to all investors. Moreover, secondary markets lead to economic development (Kakarot-Handtke,2012.

Effect of Capital Markets Activity on Performance

The activity of both primary and secondary markets has a crucial influence on the company participating in the issue and trading of securities. When a company effectively issues securities, they are able to mobilize resources for investment. The resulting factor of investment is an increase in the firm's performance, as indicated by high profits. Moreover, stock pricing in secondary markets is very crucial in the firm's decision making on investments.

Conclusion

In conclusion, primary and secondary markets are fundamental in the financial sector of any economy. The trading of securities between firms allows companies to grow in terms of performance. Firms can, therefore, primarily benefit from the capital raising function of primary markets. Moreover, the capital markets play a vital role in economic growth.

References

Andriansyah, A. (2017). The real effects of primary and secondary equity markets on firm performance. International Journal of Managerial Finance. https://www.emerald.com/insight/content/doi/10.1108/IJMF-01-2017-0006/full/html

Broner, F., Martin, A., & Ventura, J. (2010). Sovereign risk and secondary markets. American Economic Review, 100(4), 1523-55. https://www.aeaweb.org/articles?id=10.1257/aer.100.4.1523

Kakarot-Handtke, E. (2012). Primary and secondary markets. Levy Economics Institute of Bard College Working Paper, (741). http://www.levyinstitute.org/pubs/wp_741.pdf

Mendell, M., & Barbosa, E. (2013). Impact investing: a preliminary analysis of emergent primary and secondary exchange platforms. Journal of Sustainable Finance & Investment, 3(2), 111-123. https://www.tandfonline.com/doi/abs/10.1080/20430795.2013.776258