May 12, 2021
Although the word market has several meanings, in finance, the term refers to the capital markets. While the markets themselves may be deconstructed into several submarkets, the primary and secondary markets denote the majority of where securities are traded. Securities are typically created in the primary market and traded in the secondary market.
The primary and secondary markets can be used for either public and private securities, which can include a variety of securities such as equity, debt, and alternative asset classes. Securities in both markets are issued either through traditional methods, such as book entry or physical certificate, or through the more modern method of blockchain technology.
The Primary market is where securities are conceived. As it relates to private securities, this is when a company, otherwise referred to as the Issuer, lists an offering for investors to invest in. A private company issues shares or debt in order to raise capital to fund growth and or operations.
Investment banks and boutiques often help companies with these initial offerings. Typically a private company hires an investment bank to help with structuring, documenting, filing, and pricing securities. Although, this is often a lengthy and costly process.
Today blockchain technology creates a path for private companies to streamline this otherwise lengthy process. Digital asset firms now help issuers structure offerings, prepare documentation, onboard investors, create and store digital assets / tokens, and enable the investment in, trade, and recording of digital assets in the distributed ledger.
Primary market assets include much more than just equities. They encompass alternative asset classes like real estate, commodities, funds, debt, derivatives, and other alternative assets. Primary shares may be subject to minimum holding periods defined by regulation depending on the type of security issued and the type of investor (an insider of the issuing company vs. an outsider). After primary shares are issued, investors typically seek liquidity which gives rise to the secondary market.
The secondary market is for trading securities previously issued in a primary offering. In this market, one investor will offer to sell a share of a security in a marketplace where other investors are offering to buy shares; this is also called peer-to-peer trading. In the secondary market, the issuing company has no involvement in the trades.
Traditionally, the secondary market has been largely illiquid, however that’s now changed with the advent of blockchain technology, the sale and transfer of securities are simplified, with a goal of providing greater secondary market trading activity. Companies like Securitize are helping buyers and sellers of digital asset securities connect and providing the infrastructure and resources necessary to facilitate peer-to-peer trading. Peer-to-peer trading opens up the potential of a more active marketplace where market price discovery is possible.
Contributing Writers: Michael Penfield, Christie Olsen