Dealing With Money: A Firm May Look To Both The Primary And

In Dealing With Money A Firm May Look To Both The Primary And The Sec

In dealing with money, a firm may look to both the primary and the secondary market. Both of these markets are readily available here in the United States and in many developed international markets. These markets offer a plethora of options a manager in today's business world must consider. Conduct some independent research and in 1 - 2 pages please answer the following: What is the primary market? What is the secondary Market? Which market operates more efficiently? Which market has the easiest access for transactions? Your paper should include a minimum of four sources. Make sure that you format your paper and cite your sources in APA formatting style.

Paper For Above instruction

The financial markets play a vital role in the functioning of economies by facilitating the raising of capital, investment, and liquidity. Among these markets, the primary and secondary markets serve distinct functions in the process of raising and trading securities. An understanding of each is essential for firms and investors aiming to navigate the complexities of financial transactions effectively.

Primary Market

The primary market is where new securities are issued and sold for the first time. This market enables corporations and governments to raise capital directly from investors by issuing new stocks or bonds. When a firm decides to go public through an initial public offering (IPO) or issues new debt, it does so in the primary market (Mishkin & Eakins, 2018). The proceeds from the sale go directly to the issuing entity, providing capital that can be used for expansion, research, or other corporate purposes. The primary market thus acts as a conduit for capital formation and economic growth, connecting issuers with investors who seek to buy securities at their initial offering price (Foerster et al., 2019). The process of issuing securities involves underwriting, where investment banks facilitate the sale and help determine the price, ensuring that the securities are appropriately valued and efficiently distributed (Kenton, 2020). This market is characterized by one-time transactions, and the securities issued in the primary market typically have a fixed price that is determined before the offering (Bodie, Kane, & Marcus, 2014).

Secondary Market

The secondary market differs significantly from the primary market as it involves the trading of securities after their initial issuance. In this market, investors buy and sell securities among themselves through stock exchanges or over-the-counter (OTC) markets. Examples include the New York Stock Exchange and NASDAQ. The secondary market provides liquidity, allowing investors to convert their securities into cash relatively easily and at prevailing market prices. It plays a crucial role in facilitating price discovery, where the forces of supply and demand determine the value of securities (Mishkin & Eakins, 2018). Unlike the primary market, the proceeds from secondary market transactions do not go to the issuing firm; instead, they are exchanged between investors. This market increases the attractiveness of securities, as investors are more willing to buy if they know they can sell easily in the future (Foerster et al., 2019). The efficiency of the secondary market, in terms of information dissemination and transaction costs, is generally higher due to the liquidity and competition among market participants.

Efficiency and Accessibility

In terms of operational efficiency, the secondary market typically operates more efficiently than the primary market. This is primarily because it benefits from high levels of liquidity, competitive trading, and a large volume of transactions, which contribute to more accurate price discovery and reduced transaction costs (Bodie et al., 2014). The secondary market’s continuous trading status allows prices to adjust quickly to new information, making it an efficient mechanism for valuation.

Regarding accessibility, the secondary market is generally easier for investors and firms to access. This is because securities are already issued, and trading can occur instantly through established stock exchanges or OTC platforms. Investors do not need to wait for new securities to be issued; they can buy and sell at their convenience during trading hours (Kenton, 2020). In contrast, access to the primary market is more restrictive and often requires underwriting agreements, investment bank involvement, and compliance with regulatory procedures (Foerster et al., 2019). Therefore, for ongoing trading and liquidity, the secondary market is more accessible and user-friendly for most market participants.

Conclusion

In conclusion, both primary and secondary markets are essential components of the financial system, providing avenues for capital raising and liquidity. The primary market is crucial for new securities issuance, enabling firms and governments to raise funds directly from investors. In contrast, the secondary market facilitates trading and liquidity of securities, aiding in efficient price discovery and providing investors with flexibility and ease of access. While the secondary market operates more efficiently due to its high liquidity and rapid transaction capabilities, access to it is generally simpler for investors post-issuance. Understanding these distinctions helps firms and investors navigate their financial strategies effectively, contributing to the stability and growth of financial markets.

References

• Bodie, Z., Kane, A., & Marcus, A. J. (2014). Investments (10th ed.). McGraw-Hill Education.
• Foerster, S. R., Batten, J. A., & Gaunt, C. (2019). Financial Markets and Institutions. Oxford University Press.
• Kenton, W. (2020). The Secondary Market. Investopedia. https://www.investopedia.com/terms/s/secondarymarket.asp
• Kenton, W. (2020). The Primary Market. Investopedia. https://www.investopedia.com/terms/p/primarymarket.asp
• Mishkin, F. S., & Eakins, S. G. (2018). Financial Markets and Institutions (9th ed.). Pearson Education.
• United States Securities and Exchange Commission. (2021). How the Markets Work. https://www.sec.gov/