The Stock Market - Primary and Secondary Markets

 The Stock Market — Primary Market

The primary market is the part of the stock market where new securities — stock shares or pieces of paper that state an investor owns a piece of a company — are created and sold for the very first time. This is where a company, rather than investors, directly sells its shares to the public to raise capital (cash). The most well-known example of this is the Initial Public Offering (IPO), which is the specific event when a private company "goes public" by offering its shares to investors for the first time. During an IPO, all the money raised from selling those initial shares goes directly to the company itself, funding its growth, paying off debt, or financing new projects, before those shares begin trading between investors on the secondary market.

The Stock Market — Secondary Market

The secondary market, often called the "aftermarket," is where the vast majority of stock trading occurs after securities have been sold for the first time in the primary market. Unlike an IPO where investors buy directly from the company, the secondary market consists of investors trading amongst themselves, buying and selling existing shares from one another. This is what people typically refer to as "the stock market," with major examples being the New York Stock Exchange (NYSE) and the Nasdaq. The original company is not involved in these transactions and does not receive any money. The secondary market is a market where nothing is produced, but some earn profits by “Buying Low, Selling High.” It’s similar to a trading card store or a casino — nothing tangible is produced, but money is earned, and the economy grows. How does the economy grow? Investors borrow money to purchase stocks. When they borrow money, this introduces cash into the economy that did not exist previously. Eventually, the investor sells their stocks for cash. They spend the cash. An increase in spending results in the need to make more stuff and hire more workers — the economy grows. 

The secondary market is not a completely useless casino. Investors research the companies they are gambling on. They buy good businesses — an increase in demand increases the price of the stock — and sell bad businesses — a decrease in demand decreases the price of the stock. Large investment banks use the price of a stock, which is the result of intense research by investors, to determine whether to loan money to businesses that want to borrow money to grow their business. Basically, the investors on the secondary market serve as researchers for large investment banks. This research helps banks direct capital (cash) to the best companies and not weak businesses. Over time, this leads to the growth of good companies and the decline of bad companies in the economy.