“Assignment no 4”

Investment Analysis & Portfolio Management

SUBMITTED BY :
Muhammad Ehtisham
ROLL NO: 2172032
BBA 7th EVENING SECTION (B)
Department: Management sciences
SUBMITTED TO:
DR. Faid Gul
At
NATIONAL UNIVERSTY OF MODERN LANGUAGES
Submission Date : June 9, 2020
Due date: June 10, 2020
Question: Describe the importance of primary market and secondary market
in term of company, investor, stack holders and country economy?
Answer:
Primary Market and its importance
Company:
The key function of the primary market is to facilitate capital growth by enabling individuals to
convert savings into investments. It facilitates companies to issue new stocks to raise money
directly from households for business expansion or to meet financial obligations. It provides a
channel for the government to raise funds from the public to finance public sector projects.
Unlike the secondary market, such as the stock market which trades listed shares between
buyers and sellers, the primary market exists for the issuance of new securities by corporations
and the government directly to investors. Companies raise funds in the primary market by
issuing initial public offerings (IPOs). These stock offerings authorize a share of ownership in
the company to the extent of the stock value. Companies can issue IPOs at par (market value)
or above par (a premium), depending on past performance and future prospectus. The primary
market enables business expansion and growth for domestic and foreign companies.
International firms issue new stocks--American Depository Receipts (ADRs)--to investors in
the U.S., which are listed in American stock exchanges. By investing in ADRs, which are
dollar-denominated, you can diversify the risk associated with putting all your savings in just
one geographical market.
Investors:
An investment bank sets the offer price of the corporate security as opposed to market forces,
which determines the price in the secondary market. While brokerage firms and online licensed
dealers sell IPOs to the public, you may not be allotted IPO shares because of the large demand
for a small number of shares typically issued by the company. Moreover, institutional investors
(large mutual funds and banks) usually get the lion's share of much anticipated IPOs.
Stockholders and country economy:
The government directly issues securities to the public via the primary market to fund public
works projects such as the construction of roads, building schools etc. These securities are
offered in the form of short-term bills, notes that mature in two to seven years, longer-term
bonds and treasury inflation-protected securities (TIPS) linked to the Consumer Price Index.
Visit the U.S. Treasury website for information about interest rates and maturity dates.
Government-issued U.S. Treasury bonds are free of credit risk. However, the Securities and
Exchange Commission cautions investors that IPOs are inherently risky and therefore unsuited
for low network individuals who typically are risk averse.
 Secondary market and its importance

The secondary market is where investors buy and sell securities from other investors (think of
stock exchanges). For example, if you want to buy Apple stock, you would purchase the stock
from investors who already own the stock rather than Apple. Apple would not be involved in the
transaction. Examples of popular secondary markets are the National Stock Exchange (NSE), the
New York Stock Exchange (NYSE), the NASDAQ, and the London Stock Exchange (LSE).

In secondary markets, investors exchange with each other rather than with the issuing entity. A
perfect example is the stock market. If you buy a stock, you are doing so with another individual
who already owns the stock, as opposed to buying it from the actual company whose stock it is.
The latter would occur in a primary market through an initial public offering (IPO). Secondary
markets are an important facet of the economy. Through a massive series of independent yet
interconnected trades, the secondary market steers the price of an asset toward its actual value
through the natural workings of supply and demand. It is also an indicator of a nation's economic
health. The increase or decrease in prices signals a growing economy or an economy heading
towards a recession. Moreover, secondary markets create additional economic value by allowing
more beneficial transactions to occur and create a fair value of an asset. Lastly, secondary
markets provide liquidity to the economy as sellers can sell quickly and easily due to a large
amount of buyers in the market. 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

The net result is that almost all market prices – interest rates, debt, houses, and the values of
businesses and entrepreneurs – are more efficiently allocated because of secondary market
activity.

 The secondary market helps measure the economic condition of a country. The rise or fall
in share prices indicates a boom or recession cycle in an economy.
 The secondary market provides a good mechanism for a fair valuation of a company.
 The secondary market helps drive the price of securities towards their genuine, fair
market value through the basic economic forces of supply and demand.
 The secondary market promotes economic efficiency. Each sale of a security involves a
seller who values the security less than the price and a buyer who values the security
more than the price.
 The secondary market allows for high liquidity – stocks can be easily bought and sold for
cash.
 The secondary market is where securities are traded after the company has sold its
offering on the primary market. It is also referred to as the stock market. The New
York Stock Exchange (NYSE), London Stock Exchange, and Nasdaq are secondary
markets.
 Secondary markets face heavy regulations from the government as they are a vital source
of capital formation and liquidity for the companies and the investors. High regulations
ensure the safety of the investor’s money.