A:

There are two main markets where securities are transacted: primary and secondary. When stocks are first issued and sold by companies to the public, this is called an initial public offering (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 called the primary market. Investors participating in the primary market are thus buying stock directly from the issuing company. However, this market is usually dominated by sophisticated and experienced investors (i.e. banks, pension funds, institutional investors, etc).

Therefore, unless you are an investor participating in an IPO, you are purchasing securities from another shareholder on the secondary market (stock market), and this other shareholder probably believes that the price of the stock will decline.

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 on the company's record book, 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 book of 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/losses from the shares he or she has sold.

(For more on these concepts, see Knowing Your Rights As a Shareholder, IPO Basics and Stock Basics tutorials.)

RELATED FAQS
  1. What is the average range for the price-to-earnings ratio in the electronics sector?

    Understand the difference between the primary market and the secondary market, and learn which investors are able to participate ... Read Answer >>
  2. What's the difference between primary and secondary capital markets?

    Learn how in the primary capital market, securities are issued for the first time, while in the secondary market, investors ... Read Answer >>
  3. What securities does the primary market deal with?

    Find out what kinds of securities are traded on the primary market, including who can participate in trading and the basics ... Read Answer >>
  4. What is the difference between a primary and secondary financial market?

    Learn about primary and secondary financial markets, how investors use these markets and the difference between primary and ... Read Answer >>
  5. When does a primary market become a secondary market?

    Understand the difference between the primary and secondary markets and why the secondary market is where investors go to ... Read Answer >>
  6. Who trades in primary and secondary capital markets?

    Understand how primary and secondary markets function in the trade of financial securities between investors, and learn how ... Read Answer >>
Related Articles
  1. Trading

    Comparing Primary And Secondary Capital Markets

    In the primary capital market, investors buy directly from the issuing company. In the secondary market, investors trade securities among themselves.
  2. Investing

    What is the Secondary Market?

    The secondary market is where investors purchase securities or assets from other investors, rather than from the issuing companies themselves.
  3. Markets

    Why Do Companies Care About Their Stock Prices?

    Read on to learn more about the nature of stocks and the true meaning of ownership.
  4. Investing

    What's the Primary Market?

    The primary markets are where investors can get first crack at a new security issuance.
  5. Investing

    Advising FAs: How To Explaining Stocks to a Client

    Without a doubt, common stocks are one of the greatest tools ever invented for building wealth.
  6. Investing

    A Breakdown on How the Stock Market Works

    Learn what it means to own stocks and shares, why shares exist, and how you buy and sell them.
  7. Investing

    A Look At Primary And Secondary Markets

    Knowing how the primary and secondary markets work is key to understanding how stocks trade.
  8. Investing

    How The Stock Market Works

    When you buy a stock, you buy a piece of a company.
  9. Investing

    Knowing Your Rights As A Shareholder

    We delve into common stock owners' privileges and how to be vigilant in monitoring a company.
  10. Investing

    What is a Public Company?

    A public company has sold stock to the public through an initial public offering (IPO) and that stock is currently traded on a public stock exchange.
RELATED TERMS
  1. General Public Distribution

    A type of primary market offering in which the securities being ...
  2. Secondary Offering

    1. The issuance of new stock for public sale from a company that ...
  3. Stock Market

    The market in which shares of publicly held companies are issued ...
  4. Primary Distribution

    The original sale of a new security issue (bonds or stocks) from ...
  5. Aftermarket Report

    A summary of how shares of an initial public offering (IPO) performed ...
  6. Offering

    The issue or sale of a security by a company. It is often used ...
Hot Definitions
  1. Quantitative Trading

    Trading strategies based on quantitative analysis which rely on mathematical computations and number crunching to identify ...
  2. Bond Ladder

    A portfolio of fixed-income securities in which each security has a significantly different maturity date. The purpose of ...
  3. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  4. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  5. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  6. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
Trading Center