A:

The primary market deals with all newly issued securities. When businesses, governments or other groups want to raise capital through the issuance of equity or debt instruments, the primary market is where these transactions take place. The most common securities bought and sold on the primary market are stocks and bonds.

When a business issues shares of stock for the very first time, it is called an initial public offering (IPO). To generate equity capital, the company decides to issue a set number of shares at a predetermined price for a limited time. For example, a company may issue 1 million shares at $25 per share. The issuance is facilitated by an underwriting investment bank or a group of banks, called a syndicate.

Investors who believe the company has a bright future rush in to purchase shares at what they perceive to be a bargain price. All capital generated by the sale of shares on the primary market belongs to the issuing company with no expectation that shareholders are repaid at a later date.

Conversely, bonds issued on the primary market are sold as debt instruments to investors with the promise that the face value of the bonds will be returned to the bondholder upon its maturity. Bonds essentially represent a loan from the investor to the issuing entity and often include periodic interest payments, called coupon payments.

Though the average investor can participate in the primary market, it is more common for investment firms, other businesses and very wealthy individuals to generate most of the activity. In fact, high-net-worth individuals (HNWIs) can be classified as accredited investors by the U.S. Securities and Exchange Commission (SEC), granting them immunity from many of the limitations that apply to the average investor because of their increased ability to absorb large losses.

After securities have been purchased on the primary market, any future buying and selling takes place on the secondary market. The secondary market is what most people think of as the stock market. Prices are no longer determined by the issuing entities, but rather by the fickle whims of investor sentiment.

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