Stock Market Definition, Secondary and Primary Market

Hi, today we talk about the Stock Market Definition So we discuss the basic concepts relating to stock market, its types as well as its impact of these types on the common stock. furthermore, tell about dealer and broker as well as bid price, ask price and spread

Stock Market Definition, Secondary and Primary Market

Stock Market Definition,Secondary and Primary Market

Stock Market Definition

It is a place where the stock is traded

There are two type ofStock Market, Secondary and Primary Market

Primary market

The market in which new securities are originally sold to investors

Secondary market

The market in which previously issued securities trade among investors

Above we discuss the primary and secondary market, now we discuss the Primary and Secondary Market for the Common Stock. 

 Primary market It includes

  • Initial public offering (IPO)

An initial public offer occurs when a company offers stock for sale to the public for the first time

Primary Market Definition

Stock Market Definition,Secondary and Primary Market

There are five steps in IPO that are as follows

  1. Investment banking
  2. Underwrite
  3. Fixed commitment
  4. Best effort
  5. Prospectus and red herring

 

  1. Investment banking

A firm specializing in arranging to finance for companies

  1. Underwrite

To assume the risk of buying newly issued securities from the company and reselling them to investors

  1. Fixed commitment

Underwriting arrangement in which investment banker guarantees the firm a fixed amount of its securities

  1. Best effort

Arrangement in which the investment banker does not guarantees the firm a fixed amount of its securities

  1. 5. Prospectus and red herring

The company prepares a prospectus and submit it to the SEC (Securities and Exchange Commission) for approval. Investment banker circulates preliminary prospectus (red herring)

Upon obtaining SEC Approval Company finalizes prospectus. Underwrites places announcements (tombstones) in newspapers and begin selling shares.

What is Secondary Market

Stock Market Definition, Secondary and Primary Market

  1. Secondary market

In Secondary market stock trading among investors is directed through three channels. Investors may trade

  1. Directly with other investors
  2. Indirectly through a broker who arrange transactions with others
  3. Directly with a dealer who buys and sells securities from inventory

furthermore, we discuss the dealers and brokers.

  • Dealer

A trader who buys and sells securities from inventory

  • Broker

An intermediary who arrange security transaction among investors

Furthermore, we discuss bid price, ask price and spread

  • Bid price

the bid price is referred to as a price a dealer is willing to pay is called bid price

  • Ask price

The price at the dealer will sell it called the asking price

  • Spread

The difference between ask price and bid price is called spread.

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