Understanding the Financial Markets

It is essential that newcomers to the Banking & Finance industry gain a solid understanding of the financial markets. Once this understanding is developed, one can acknowledge their contribution towards a specific financial market, depending on which setor of Banking & Finance you choose to work in. So I thought I'd share some information to help with this.

Buying and selling securities such as stocks and bonds takes place in one of two markets.

The term marketplace or simply market is a reference to a place where goods and services are bought and sold. The New York Stock Exchange is one example of a market where trading takes place and is one of the best known markets in the world. 

 

Stock Exchanges

There are two primary theoretical marketplaces where securities are traded. The term theoretical is used here because the market need not be a physical place where buyers and sellers meet to trade securities

. This is akin to references to different markets for selling both new and used automobiles. The primary market for car sales refers to sales of cars between the manufacturer (or a dealership) and the buyer. A secondary market refers to used car sales and may be between any owner and seller. The point is that primary markets refer to new sales and secondary markets refer to used sales.
A stock exchange is any legally recognized market where securities can be bought and sold. Corporations that issue stock are traded in these markets and typically wish to be listed as an officially traded company so that the shares of stock can be purchased by investors in a liquid market. In addition, stock exchanges are regulated such that both companies and investors must follow trading rules making the transition of ownership safer and less risky. The liquidity of the market refers to the ease with which ownership of a company in the form of stocks can be bought and sold without delay or complications afforded by selling the stock on a one-to-one basis between each company and investor.

Primary and Secondary Markets

A primary market refers to any market where new shares of stock are sold. A corporation wishing to sell new shares of stock benefits from this sale because the stock is sold in the market directly by the issuing company. This is in contrast to secondary markets where shares of stock already in circulation and issued at a previous date are traded among investors. The company who issued the stock does not benefit directly from the sale of stock in a secondary market because the money paid for the stock goes to the seller in exchange for part ownership in the company. In this case, the company is not involved in the transaction.