Question

Explain the difference between primary and secondary markets and why secondary markets are so important to businesses that need to raise capital? Give examples from the real world?

Answer 1

ROLE OF SECONDARY MARKET IN RAISING FUNDS -

Secondary market plays a crucial role in raising funds for the growth of the company . It assists in increasing the value of the firm by creating more liquidity of stocks of the firm. In secondary market investors exchange with each other rather than with the issuing entity. Through massive series of independent yet interconnected trades, the secondary market drives the price of securities toward their actual value. Moreover, the secondary markets create additional economic value by allowing more beneficial transactions to occur. The net result is that almost all market prices – interest rates, debt, houses and the values of businesses and entrepreneurs – are more efficiently allocated because of secondary market activity.Secondary markets exist because the value of an asset changes in a market economy. These changes are driven by technology, individual tastes, depreciation and improvements, and countless other considerations.
  

Example of seconday market-

In 2011, researchers at the McDonough School of Business at Georgetown University gathered data on new and existing home sales in the United States between 1960 and 2010. They found that existing home sales volume was, on average, between six and 12 times larger than new home sales.

New home sales represent a primary market; a home builder is the original producer and issuer of the house. The first home buyer is the primary buyer. When the primary buyer decides to sell the home, it becomes a secondary market asset. Here, home buyers are negotiating with home buyers; no primary issuer is involved.

Imagine what would happen to the housing market if homes couldn't enter a secondary market. Housing prices would be far less flexible and accurate than they are today, and almost no home buyers would enter the primary market, either. There isn't much incentive to buy a permanently large asset that is locked into a specific location