Question

Explain the difference between the primary and secondary markets. What roles do banks play in these markets?

Answer 1

Differences between primary and secondary markets-

1. Primary market is the place where new capital is raised. Secondary market is the place where these already issued securities are traded.

2. Primary market is called New Issue Market. Secondary market is called after market.

3. In primary market, purchasing is direct. In secondary market, purchasing is indirect.

4. In primary market, a security can be sold only once. In secondary market, it can be sold multiple times.

5. In primary market, the transaction is between the investor and the company. In secondary market, it is between the investors itself.

6. In primary market, intermediaries are called underwriters. In secondary markets, they are known as brokers.

7. In primary market, the price of the security is fixed. In secondary market, the price of the security fluctuates depending on the demand-supply scenario.

Role of banks in these markets:

Banks are hired as an intermediary to facilitate deals between corporations and investors. Their job is to match these corporations and investors according to their risk profile, return expectations and investment styles. Additionally, banks trade securities on behalf of the clients to maximize profits.

They may invest in equities and mutual funds for their own fund management. Banks also play the role of clearing houses in these markets.