Primary market vs secondary market: what’s the difference?

May 2, 20223 min read
Primary market vs secondary market: what’s the difference?
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Key Takeaways

  • The primary market is the initial source of capital for an issuer, while the secondary market enables investors to trade financial instruments. 
  • The primary market is reserved for institutional investors, which typically underwrite an initial security offering.
  • Private securities are rarely traded on the secondary market.

How primary markets work

On primary markets, the security issuers, with help from investment banks, sell securities in order to raise capital. These initial public offerings (IPOs) afford investors opportunities to purchase equities directly from the issuing firms, often at a lower price.

Underwriting firms work with companies to establish the price at which the instrument will initially be sold to the public, which is usually lower than the expected market price as underwriters prefer the offer to be oversubscribed. The sale is usually completed at once,  mostly to minimize the potential for volatility.

Private placements and rights offerings

A rights offering issue allows investors who currently own the stock to make additional purchases at a prorated value. This is a perk offered to existing investors in order not to dilute their existing position.  

Private placements are offered so that investors can purchase shares directly from the issuer without having to compete with the general public. Preferential allotments give institutional investors the opportunity to purchase shares at a price that is withheld from retail investors. 

Who can access the primary market?

Retail investors do not usually participate directly in primary market offerings, which are usually reserved for institutional investors, though key groups of high net worth individuals or institutional investors are often invited to participate in private placements. Rights offerings restrict participation to those who are designated by the issuer as eligible, such as current investors in the company. 

Preferential allotments restrict offerings to selected groups, though those invited do not need to have a prior relationship with the company. 

How the secondary market works

Investors can buy and sell securities on secondary markets, without any involvement from the issuers. 

The secondary markets can be auction-driven or dealer-driven. In an auction market, buyers and sellers communicate the prices at which they are willing to trade. These bid-and-ask prices will typically coalesce into the share price of a given stock when an amount agreeable to both sides is reached. In a dealer market, multiple dealers post prices at which they will buy or sell a specific security or instrument. 

Generally speaking, secondary markets tend to be more liquid because of the number of people participating in them. They also present opportunities for diversification, as most major funds and indices are traded on the secondary market. 

Secondary markets can also be over-the-counter, or OTC. An over-the-counter (OTC) market is a decentralized market in which market participants trade stocks, commodities, currencies, or other instruments directly between two parties and without a central exchange or broker.

Alternative investments do not trade on secondary markets (for now…)

Real estate, private equity, venture capital, digital assets and collectibles are among the asset classes designated “alternative investments,” traditionally accessible to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums – often between $500,000 and $1 million. Private market investments are usually not tradeable on secondary markets, as they are not fungible like public equity or fixed income securities. 
Yieldstreet was founded with the goal of improving access to alternative assets by making them available to a wider range of investors. While traditional portfolio asset allocation envisages a 60% public stocks and 40 percent fixed income allocation, a more balanced 60/20/20 or 50/30/20 split may make a portfolio less sensitive to public market short-term swings. In addition to that, by being a platform for alternative investments, Yieldstreet aims to offer the opportunity to diversify, crucially, within the private market space.

Learn more about the ways Yieldstreet can help diversify and grow your portfolio.