Primary vs. Secondary Markets: Where Securities are born and where they trade

Many new investors, as well as exam candidates, think of “the stock market” as a single place where everything happens.

In reality, there are two distinct markets that serve very different purposes: the primary market and the secondary market. Understanding the difference isn’t just foundational finance knowledge; it’s a frequent source of confusion on the Securities Industry Essentials (SIE) and Series 7 exams.

Here’s how to think about each one, and why the distinction matters.

The Primary Market: Where securities are created

The primary market is where securities are initially issued, offered, and sold.

This is the market that allows companies, municipalities, and governments to raise capital directly from investors. When a security is sold in the primary market, the money goes to the issuer, not to another investor.

Common primary market transactions include:

• Initial public offerings (IPOs)
• New stock offerings
• New bond issues

In a typical primary market transaction:

1. The issuer receives the proceeds
2. An investment bank underwrites the offering
3. Investors purchase brand-new securities that have never traded before

Example:

A company issues new shares to raise funds for expansion, and investors purchase those shares through an underwriter. That transaction occurs in the primary market.

Exam insight: If the proceeds are allocated to the issuer, the transaction is considered to be in the primary market, without exception.

The Secondary Market: Where securities trade

Once securities have been issued, they begin trading between investors. This activity takes place in the secondary market.

In the secondary market:

• The issuer is no longer involved
• Investors buy and sell existing securities with each other
• Prices are determined by supply and demand
• The market provides liquidity, allowing investors to convert securities into cash

Stock exchanges like the New York Stock Exchange (NYSE) and Nasdaq are secondary markets, as are over-the-counter trading venues.

Example:

An investor sells shares of stock to another investor on a national exchange. The issuing company does not receive any money from this transaction.

Exam insight: If investors are trading with each other and the issuer is not involved, it’s a secondary market transaction.

Primary vs. secondary: A simple comparison

Here's a table to help you quickly understand the difference between markets:

In summary: Primary markets help issuers hit the ground running with initial funding, while secondary markets allow external investors to buy and trade shares.

How this appears on the SIE and Series 7 Exams

Exams like the SIE, Series 6, and Series 7 typically test this concept in straightforward scenarios:

“An investor purchases newly issued shares through an underwriter.”

→ Primary market

“An investor sells shares on a national exchange.”

→ Secondary market

If you focus on where the money goes, the correct answer usually becomes obvious.

Why both markets matter

The primary and secondary markets work together to keep the financial system functioning:

• The primary market enables capital formation
• The secondary market creates liquidity and price discovery
• One brings securities into existence. The other keeps them moving.

Understanding how they differ and how they connect is crucial knowledge not just for passing your exams, but for fully comprehending how modern markets actually function.