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Types of Markets: Primary, Secondary, OTC

For investors, there are many venues to invest and trade different assets. The markets may be primary, secondary, or an over-the-counter market.

These three names pertain to different kinds of capital markets. And each of them has its unique characteristics.

Let’s take a look at them and how you can benefit from each type.

The Primary Market

You can consider the primary market as the birthplace of securities. This is where firms and companies sell or float new stocks and bonds to the public investors for the very first time.

Initial Public Offering

An initial public offering, or IPO, occurs when a previously private company issues stock to the public for the first time.

This provides you as an investor to purchase securities from the bank that underwrote the particular stock.

This is how the underwriting works: the private company hires three underwriting banks to polish the financial details of the IPO, including how much the stock initially costs.

Then, during the IPO, investors can buy the stock at the set price directly from the company.

Rights Offering Issue

A rights offering issue lets a company to raise more capital in the primary market after already having their security enter the public, or secondary, market.

The firm offers its existing clients prorated rights based on the shares that they presently own. Others, on the other hand, can invest in newly issued stocks.

The Secondary Market

After the primary market comes the secondary market. When you’re buying equities, you usually call this market simply the stock market.

Some examples of secondary markets are the New York Stock Exchange, NASDAQ, and all major exchanges around the world. One unique characteristic of this market is that investors are trading stocks among themselves.

Two Categories of the Secondary Market

You can further divide the secondary market into two categories, which are:

  • Auction market
  • Dealer market

Auction Market

In an auction market, participants meet in one area to trade securities and announce the prices at which they want to buy and sell assets.

Those prices are what you call the bid and ask prices. The key logic behind this is that an efficient market should be dominant as participants declare their prices.

Dealer Market

Meanwhile, the dealer market doesn’t require parties to meet in one location. Instead, the participants connect with each other through electronic networks.

Dealers have an inventory of the assets and is ready to buy or sell with participants. These dealers get their profits from the spread between the buy and sell prices of securities.

Over-The-Counter Markets

These days, the term “OTC markets” refer to the marketplace where you can buy and sell stocks that are not traded on stock exchange like the NYSE or NASDAQ.

This means that the stock trades either on the over-the-counter bulletin board (OTCBB) or the pink sheets.

It’s important to note that neither of these are exchanges. They are simply providers of securities’ price information.

OTCBB and pink sheet companies follow fewer regulations to comply with when compared to those that trade shares on a stock exchange. Most of the stocks you can find on the OTC markets are penny stocks.