What distinguishes a primary market from a secondary market?

The primary market is specifically characterized as the arena in which new securities are issued and sold for the first time. This is where companies or governments raise capital by offering shares or bonds directly to investors. The process allows issuers to receive funds directly from investors, which can then be used for various purposes such as expanding operations, paying off debts, or funding new projects. The transaction results in the creation of new financial instruments that have not been available on the market before.

In contrast, the secondary market involves the trading of existing securities. Here, investors buy and sell securities that have already been issued in the primary market. The transactions that occur in the secondary market do not directly affect the issuing company, as the funds from these trades go to the selling investors rather than the issuer.

Understanding this distinction is crucial for grasping how securities markets operate, as it highlights the flow of capital and the types of transactions occurring in these different market spaces.