What distinguishes a primary market from a secondary market?

The primary market is characterized by the issuance of new securities. This is where companies or governments bring their securities to the public for the first time, typically through an Initial Public Offering (IPO) for stocks or through bond offerings. Investors purchase these securities directly from the issuer, which is crucial for the entity raising capital.

In contrast, the secondary market is focused on the trading of existing securities. After the initial issuance, these securities are bought and sold among investors without any involvement from the issuing company. This market provides liquidity and enables price discovery for previously issued securities, ensuring that investors can trade their holdings more easily.

Understanding this distinction is fundamental in finance, as it highlights the roles each market plays in the economy: the primary market facilitates capital formation, while the secondary market enhances liquidity and market valuation.