Original issuers sell stock, or make their initial public offering, on the primary market. Subsequent trading and selling of stock after the initial public offering, or IPO, occur on secondary markets. Finance involves the acquisition and management of financial resources, including capital raised through the financial markets. A company’s initial stock offering raises funds to finance its growth or expansion. However, the secondary market also is critical to finance, especially long-term growth and investment.
Secondary markets include option markets and deal markets in which ownership of securities is transferred. Investors create auction markets, such as the New York Stock Exchange, by congregating in one physical area to announce bids and ask prices and to trade and sell stock. Deal markets are electronic markets that have no requirement for participants to congregate in one area. Dealers create deal markets, such as the NASDAQ, by connecting electronically to buy and sell, compete for sales and earn profits based on the spread between the buy and sell price.
Most stock trading occurs on the secondary market, which provides a highly liquid, relatively safe and readily available venue for the resale of stock. Secondary markets provide investors with protection by organizing and regulating the markets to operate as fair and open marketplaces with safeguards against scams, fraud and risk. Trading of stock on the secondary market frees investors to sell when the need arises while allowing companies to continue using the money to finance growth over longer periods of time. The addition of international financial markets adds to the length of time securities continue to be traded.
Market Influence and Future Investment
The ease of selling stock on the secondary market affects the willingness of investors to buy stock on the primary market. Companies monitor and attempt to influence secondary market stock prices. Unlike primary markets, which set stock prices before stocks are issued, secondary markets allow stock prices to develop based on supply and demand . A company may implement controls to stop the devaluing of its stock, which could affect future investment in the company. Companies consider secondary market stock prices when making management decisions about growth and expansion.
Private markets, once a common occurrence in primary markets, are increasingly found in secondary markets. Startup and nonpublic companies can avoid the restrictive and expensive market regulations for public offerings and raise capital to finance growth through the placement of private securities for arranged sales. Private markets provide a venue for alternative investments, unregistered securities and private company securities.
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