Lesson 7 of 7 · 15 min
Primary markets, secondary markets and how trades are arranged
Issuers sell new securities in the primary market and investors trade them in secondary markets, whose liquidity lowers issuers' cost of capital; secondary trading is organised as call or continuous sessions in quote-driven, order-driven or brokered markets.
In short
- IPO: first public sale of a security; seasoned (secondary) offering: more of an already-issued security. Both are primary market transactions.
- Underwritten offering: the bank guarantees the sale and buys unsold securities; best efforts: the bank acts only as broker. Underwriters' conflict of interest tends to underprice IPOs.
- Other routes: private placements, shelf registrations, dividend reinvestment plans, rights offerings, and government auctions.
- Liquid secondary markets let investors sell easily, so they pay more for new issues, lowering issuers' cost of capital.
- Call markets trade at set times (one uniform price); continuous markets trade any time. Quote-driven: trade with dealers; order-driven: rules match orders (price, display, time precedence); brokered: brokers find counterparties for unique assets.
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