There are both fixed and variable income prospects in the financial market. Variations in the manner in which investments are traded give birth to the primary and secondary markets.
Knowing their particulars is important because each of them has unique qualities. As a result, you will be able to decide when and how to take advantage of the opportunities present in these markets so that you may invest your way to financial success.
Interested? Therefore, continue reading to discover more about the variations between the primary and secondary markets!
What is the primary market, and how does it work?
It’s interesting to start with the main market when discussing the marketplaces for the distribution of securities. You must understand that, in this situation, it symbolizes the setting in which investment issuers and investors bargain.
As a result, the businesses in charge of offering these investments immediately raise funds. It is important to comprehend how the main market operates in both fixed and variable income situations.
Fixed income
Investors have the option of purchasing financial instruments directly from their issuers in the primary fixed income market. For instance, you purchase government bonds from the National Treasury, which is in charge of issuing them.
Variable income
The availability of securities, such as shares or quotas of certain investment funds, is essential to the primary market’s operation in variable income.
The investor gets access to the assets sold on the major stock market, for instance, when the firm conducts an initial public offering (IPO). After all, when the shares are initially offered for sale, this marks the company’s debut on the stock exchange.
Another option is the issue of additional shares of corporations that are already listed on the stock exchange in a later offering of shares (follow on). In any case, the funds are added to the company’s cash and may be used to fund initiatives, settle debts, or boost the company’s financial stability.
Trading on the primary market of the stock exchange comprises the launch of shares in relation to investment funds. In this instance, the proceeds from the sold shares go toward the equity of the fund and are managed by a qualified manager.
When you purchase shares of index funds (ETFs) or real estate funds (FIIs) during the IPO or follow-on, this is what occurs. Additionally, there are open-end equity funds that provide unrestricted admission and exit by investors. There won’t be any exchanges between investors in these circumstances; all transactions will always involve the fund.
What is the secondary market, and how does it work?
It makes sense to comprehend the secondary market and how it is described now that you are familiar with the main market, don’t you think? In this case, asset purchases and sales happen between investors rather than between the investor and the issuer.
In light of the availability of assets and applications, the secondary market proposal calls for enabling the trading of securities between third parties.
In general, the secondary market serves to provide investors with liquidity. You couldn’t, for instance, convert a long-term bond into cash that doesn’t permit early redemption without it.
See how this market functions in each investment class below to grasp the dynamics at play better!
Fixed income
Prior to the investment redemption period, it is allowed to exchange fixed income instruments. In this scenario, stockholders who want to sell their securities can do so by making them accessible to other interested parties.
This might be a method to benefit from bonds with restrictions that are no longer on the market, for instance. Imagine if a bank had issued a CDB with a yield equal to 105 percent of an IDC (CDI).
This investment, which does not allow for early redemption, is held in an investor’s portfolio but must be sold for whatever reason. The security could then be made accessible on the secondary market in this situation.
The secondary market bond may be a good option if the same bank’s existing CDBs yield 95% of the CDI. After all, it offers a greater return than would be possible with the use of current applications.
On the other side, for those who offer the investment on the market, this is a chance to have liquidity and convert the investment into cash.
Treasury Direct bonds are the one exception to this rule. You will bargain with the Treasury by selling them in advance since the institution guarantees the buyback, right?
Variable income
For many investors, the secondary equities market is well-known. After all, it hosts the majority of asset and financial vehicle purchases and sales made on the Brazilian stock exchange (B3).
This is due to the fact that you must bargain with another investor in order to purchase shares outside of the IPO or follow-on period. The same is true, for instance, when purchasing or selling shares of closed-end variable income funds.
What are the main differences between both markets?
Right, it was simpler to comprehend the distinctions between the primary and secondary markets after learning about their features.
The established negotiation is the first key point. You purchase securities directly from the issuer in the primary market. As you are aware, trading occurs on the secondary market among investors, independent of the issuing firm.
Money has a different outcome as well. It goes to the fund or the issuing institution in the primary market. The investor or speculator who sells his asset, application, or investment vehicle in the secondary market is the one who receives the money.