Question

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

Answer 1

Primary market is the market where securities are initially issued. The securities issued in the primary market come into existence through their initial issue, and are not traded before. For example, an IPO is an example of a primary market. The shares issued by companies in the IPO are created in the process of the IPO, and did not exist before the IPO.

Secondary market is the market where securities already issued are exchanged between buyers and sellers. For example, stock exchanges such as NASDAQ and NYSE are secondary markets. Shares which are previously issued by companies, are traded on these exchanges.

Banks play the role of market makers and advisors in these markets. Bankers provide market research, underwriting, marketing, and advisory services to the issuers of these securities. Banks also facilitate smooth functioning of primary and secondary markets by providing financial intermediation services such as escrow services, financing, custodianship, trusteeship etc.