When one shareholder sells stock directly to another the transaction is said to occur in the:

If you buy shares in a company, it doesn't necessarily mean you're buying it from another shareholder who wants to sell their stock. There are two main markets where securities are transacted: the primary market and the secondary market.

When stocks are first issued and sold by companies to the public, this is called an initial public offering, or IPO. This initial or primary offering is usually underwritten by an investment bank that will take possession of the securities and distribute them to various investors. This is the primary market. Investors participating in the primary market are thus buying stock directly from the issuing company.

Prices on the primary market tend to be set prior to the IPO, so the investor knows how much they will pay in order to invest in shares of that company's stock. However, this market is usually dominated by sophisticated and experienced investors, such as banks, pension funds, institutional investors or hedge funds.

The Secondary Market = The Stock Market

The secondary market is where investors buy and sell shares they already own and is more commonly referred to as the stock market. Any transactions on the secondary market occur between investors, and the proceeds of each sale go to the selling investor, not to the company that issued the stock or to the underwriting bank. Prices on the secondary market fluctuate and may be determined by basic forces of supply and demand. Therefore, unless you are an investor participating in an IPO, you are purchasing securities from another shareholder on the secondary market. 

A shareholder is considered to be any entity that has legal ownership of a company's shares. Having legal ownership means being recorded as the shares' owner by the company: When you buy a stock from another investor, three days after the transaction has occurred your name will appear in the company's record books, and you will be deemed the holder of record. The investor from whom you purchased the shares will at the same time be removed from the records.

Regardless of whether the investor selling you the stock is an individual, a financial institution or the company itself, it is considered to be a shareholder because it possesses legal ownership of the stock. The seller of a stock is forfeiting all associated rights to the shares, such as any dividends, distributions or further capital gains (or losses) from the shares they have sold.

What Is a Secondary Market?

The secondary market is where investors buy and sell securities they already own. It is what most people typically think of as the "stock market," though stocks are also sold on the primary market when they are first issued. The national exchanges, such as the New York Stock Exchange (NYSE) and the NASDAQ, are secondary markets.

Secondary Market

Understanding Secondary Market

Though stocks are one of the most commonly traded securities, there are also other types of secondary markets. For example, investment banks and corporate and individual investors buy and sell mutual funds and bonds on secondary markets. Entities such as Fannie Mae and Freddie Mac also purchase mortgages on a secondary market.

Transactions that occur on the secondary market are termed secondary simply because they are one step removed from the transaction that originally created the securities in question. For example, a financial institution writes a mortgage for a consumer, creating the mortgage security. The bank can then sell it to Fannie Mae on the secondary market in a secondary transaction.

Key Takeaways

• In secondary markets, investors exchange with each other rather than with the issuing entity.
• Through massive series of independent yet interconnected trades, the secondary market drives the price of securities toward their actual value.

Primary vs. Secondary Markets

It is important to understand the distinction between the secondary market and the primary market. When a company issues stock or bonds for the first time and sells those securities directly to investors, that transaction occurs on the primary market. Some of the most common and well-publicized primary market transactions are IPOs, or initial public offerings. During an IPO, a primary market transaction occurs between the purchasing investor and the investment bank underwriting the IPO. Any proceeds from the sale of shares of stock on the primary market go to the company that issued the stock, after accounting for the bank's administrative fees.

If these initial investors later decide to sell their stake in the company, they can do so on the secondary market. Any transactions on the secondary market occur between investors, and the proceeds of each sale go to the selling investor, not to the company that issued the stock or to the underwriting bank.

Secondary Market Pricing

Primary market prices are often set beforehand, while prices in the secondary market are determined by the basic forces of supply and demand. If the majority of investors believe a stock will increase in value and rush to buy it, the stock's price will typically rise. If a company loses favor with investors or fails to post sufficient earnings, its stock price declines as demand for that security dwindles.

Multiple Markets

The number of secondary markets that exists is always increasing as new financial products become available. In the case of assets such as mortgages, several secondary markets may exist. Bundles of mortgages are often repackaged into securities such as GNMA pools and resold to investors.

What is secondary market example?

Which one of the following transactions occurs in the primary market?

What refers to buying and selling of existing securities?

What does it mean when an investor buys stock in a company?