What is the difference between primary and secondary markets?

Answer

In the investment community, the primary market refers to the market where securities are created, while the secondary market is the stock market where investors trade securities that they already own. While these terms sound similar, they refer to two very different things.

When investors refer to primary markets, they are referring to what often is called an initial public offering, or IPO. When a private company decides to sell shares of stock on the open market, it prepares a preliminary list of the company's assets and the expected value of the issue, which is reviewed by an underwriting firm. Called a preliminary prospectus, or "red herring," this document is not official until it is approved by all of the appropriate government regulatory agencies. Once that occurs, it becomes an official prospectus, which is the document that investors review when they determine whether or not to buy the stock.

Once investors purchase a stock, it is no longer traded on the primary market as an IPO. Investors now deal directly with each other without the involvement of the issuing corporation. This occurs in the secondary market, which includes the New York Stock Exchange, Nasdaq and other stock markets around the world.

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