What you will learn
- Explain where a security is first sold and where investors trade it later
- Describe what happens in an IPO and who receives the money
- Explain why buying an established stock usually sends no cash to the company
- Describe how the secondary market helps the primary market work
A security passes through two types of markets. The issuer first sells it in the primary market. After that, investors buy and sell it in the secondary market. This distinction answers a useful question: when you buy a stock, does the company get your money? For an ordinary exchange trade, the answer is usually no.
The primary market
The primary market is where an issuer sells a new security and receives the money. An Initial Public Offering, or IPO, is a common example. A private company sells shares to the public for the first time and raises cash it can use to grow. A government uses the primary market when it sells new bonds at auction.
Primary vs. Secondary Markets Video
The walkthrough separates the primary market from the secondary market and explains what each one does.
Key terms
- Issuer
- The company or government that creates and sells a security to raise money.
- IPO (Initial Public Offering)
- The first time a company sells its shares to the public, turning it from private to publicly traded.
- Underwriter
- An investment bank that helps set the price of an offering and finds buyers for the new shares.
- Capital
- Money a business raises and uses to operate and grow.
- Secondary offering
- A later sale of additional new shares by a company that is already public, raising more capital.
- An IPO turns a private company into a public company. It raises money and creates shares that investors can trade later.
- Underwriters are usually investment banks. They help price the deal and find buyers before trading begins.
- A public company can raise more money later by selling additional new shares in a secondary offering.
The secondary market
The secondary market covers trades that take place after the issuer has sold the security. If you buy a share of a well known public company through a broker, another investor is usually selling it to you. Your money goes to that investor, and the company receives none of the purchase price. Almost all the trading volume you hear about in the news comes from this market.
| Question | Primary market | Secondary market |
|---|---|---|
| Who sells to you? | The issuing company or government | Another investor |
| Who gets your money? | The company (it raises capital) | The other investor |
| Typical example | An IPO or a new bond auction | Buying a share of Apple on the exchange |
| How often it happens | Rarely, and only when new securities are issued | Constantly throughout each trading day |
Does the company get your money?
Apple has been public for decades. Today you buy 5 shares of Apple through your brokerage app. Where does your money go?
Buying an established stock on an exchange is a secondary market trade. The seller receives your money, and the company receives none of the purchase price.How much a company raises in an IPO
A startup goes public and sells 10,000,000 new shares to investors at an IPO price of $20 per share. Roughly how much capital does the company raise, before fees?
- Set up the calculation. Multiply the number of new shares by the price per share.
- Calculate the amount. 10,000,000 shares times $20 equals $200,000,000.
Why it matters: The company can use this money for hiring, research, or debt repayment. Raising that capital is the purpose of the primary market.
Your turn: size the raise
A company sells 4,000,000 new shares in its IPO at $25 per share. How much capital does it raise, before fees?
The issuer receives money in the primary market. In the secondary market, investors trade with one another.
How the two markets support each other
Investors are more willing to buy new IPO shares when they expect to be able to sell them later. An active secondary market gives them that option. The issuer receives no money from those later trades, but their liquidity makes the original issue more attractive to buyers. That helps companies raise money in the primary market.
IPOs explained (Charles Schwab)
Charles Schwab follows the IPO process through the roles of the issuer and underwriter, then into secondary trading.
Connect the two markets
Explain in a few sentences why a company still benefits from an active secondary market, even though it receives no money when its shares trade there.
Write an answer before comparing it with the model response.
Model answer
An active secondary market gives investors a place to sell their shares later. That makes them more willing to buy shares during an IPO, when the company raises money. A liquid secondary market can also support the share price and help the company raise more capital in a later offering.
The next lesson introduces the people and institutions that issue, buy, sell, and oversee these securities.