Economics

Types of capital market: Primary market and secondary market

len Alfred Ajibola - 02nd December, 2023 @ 11:57 AM

Topics in Economics

Types of capital market: Primary market and secondary market Capital market explained with its functions Basic tools for economic analysis: Graphs explained with its characteristics and importance Basic tools for economic analysis: Tables explained with its characteristics and importance Factors affecting population in economics Advantages of Inflation Disadvantages of Inflation Concept of Inflation in Economics Scheme of work for Economics, SS1, First Term Scheme of work for Economics, SS1, Second Term Scheme of Work for Economics, SS1, Third Term Functions of the Wholesaler Advantages and Disadvantages of the Wholesaler Wholesale Market: Who is a Wholesaler? Characteristics of the Wholesaler Retail Market: Who is a Retailer and Examples of Retailers Market: Types of Market What is a Market in Economics? Elasticity of supply explained with its types Supply Elasticity: Elasticity of Supply explained


Academic Questions in Economics

Please click here to see all Questions and Answers

_____ is defined as a gradual and sustained rise in price level of goods and services in relation to their availability.

  • A. Basis Point Rate

  • B. Hike Rate

  • C. Elastic Supply

  • D. Elasticity of Price

  • E. Price Inflation

  • F. Aggregate Supply

The wholesalers can bring about an economy of scale.

  • A. True

  • B. False

Which of the following statement isn't a characteristics of the wholesaler?

  • A. They may have to operate in specific areas or regions accorded them by the producer

  • B. They are often popular in the line of goods they supply

  • C. They are not risk bearers

  • D. They have good storage facilities

  • E. They often pay for goods supplied by the manufacturers in advance

  • F. They usually have business agents or brokers

The wholesalers act as the middlemen in supply chain.

  • A. True

  • B. False

Large retailers who buy directly from manufacturers are termed as _____.

  • A. Wholesale Retailers

  • B. Certified Retailers

  • C. Codified Retailers

  • D. Commodity Retailers

  • E. Manufacturers Retailer

  • F. Conspicuous Retailers

_____ is a market whereby the sellers buy goods in lesser quantities from the wholesalers and sells in bits to the final consumers.

  • A. Commodity

  • B. Retail

  • C. Wholesale

  • D. Labour

  • E. Common

  • F. General

Which of the following is not a financial market?

  • A. Money Market

  • B. Bond Market

  • C. Foreign Exchange Market

  • D. Virtual Market

  • E. Capital Market

  • F. Stock Exchange Market

A _____ market provides a platform whereby job seekers link up with employers in an attempt to be hired.

  • A. Wholesale market

  • B. Bond market

  • C. Physical market

  • D. Virtual market

  • E. Factor Market

  • F. Labor Market



Types of Capital Market:

Recall that the capital market is a financial market that utilizes equity and debt securities as its form of investment.

You can think of equity securities as shares. These shares are sold by a corporation or company, and are purchased by individuals or organizations, both of whom are referred to as investors. By buying a corporation's equity (shares), the investors automatically become shareholders of the corporation. This implies that the investors own a portion of the corporation in accordance to their shares. For this reason, they will get an appropriate dividend if the corporation makes profit.

Debt securities are traded in the bond market. They are utilized by corporations and government agencies to raise capital through the sale of bonds.

Please read the introduction of capital market alongside its functions here.

 

The capital market consist of two types of markets. These are the primary and secondary market. They are explained below:

 

  • Primary Market 

The primary market, sometimes called a new issue market, is considered a first-tier security market. In this market, corporations sell new securities which include bonds, stocks, and shares to institutions (acting as investors), in return for their capital investment. Therefore, the securities in the primary market are traded for the very first time.

The corporations that operate the primary market include issuing houses like central banks, commercial banks, mortgage banks, merchant banks, insurance companies, and so on.

You can read on bank wire and bank transfer here.

 

The fundraising process of a corporation (or company) in the primary market may occur in four ways. These are:

  1. Initial Public Offering: This is the first public offering a corporation issues concerning the availability of its securities. The price of securities, e.g, stock, is set by the corporation involved; but must be highly regulated. In Nigeria, the Securities and Exchange Commission (SEC) regulates this process.

  2. Follow-on Public Offer: After the issuance of an initial public offering, the corporation can still offer their current investors the opportunity to purchase more shares. Therefore, those who had initially bought shares through the initial public offering can buy additional shares in view of potentially earning more dividend. However, it is worthy of note to state that follow-on public offer can be dilutive or non-dilutive.

  3. Private Placement: The sale of equities and bonds are not made public. Rather, only a few chosen investors are made aware of this opportunity.

  4. Preferential Allotment: Preference is given to the sale of securities. In this regard, the corporation will often sell its securities to a few privileged persons (or organizations) at a discounted rate.

You can read on price as a marketing mix here.

 

The sale of securities in the primary market may occur through a process termed underwriting. When this is accomplished, investment banks are hired to match the corporations and investors with regards to their investment and risk profile.

When all is set, a public accounting firm may be hired to aid the corporation in preparing, auditing, reviewing, and taxation processing of their financial statement in order to ensure transparency of their financial outlook.

Please read on bookkeeping and accounting explained with their differences here.

 

With respect to the above paragraph, the important components of a primary market are explained below:

  • Corporations: They are the businesses that require capital to grow and run their operations. To achieve this, they sell their bonds and stocks (securities) online through various trading applications. Examples of corporations include amazon, apple, meta, toyota, Dangote group, alphabet inc, and so on.

  • Please read on the advantages and disadvantages of corporations here.

  • Institutions (Investors): The institutions consist of the investors and fund managers who buy debts and equities (bonds and shares). They therefore provide capital to the corporations, with a goal of making profits. As a result, these institutions can become a part owner of the corporation. The investors can be both institutional and retail investors.

  • Investment Banks: These are intermediaries that connect corporations to the institutions, while also calculating the risk of investment alongside their profit ratio. Through their actions, they facilitate deals between the corporations and institutions. Examples of institutional banks include JP Morgan, Goldman Sachs, Bank of America, Barclays, Morgan Stanley, Wells Fargo, HSBC, UBS, Citigroup, Credit Suisse and so on.

  • Public Accounting Firms: The corporations will typically hire a public accounting firm to ensure the financial transparency of their business. Public accounting firms are involved in financial reporting, making financial statements, financial auditing, alongside tax calculations.

 

In Nigeria, the primary market is regulated by the Securities and Exchange Commission (SEC). They are the apex regulator of the Nigerian capital market.

 

Corporations (or companies) utilize the primary market to attract investments through the selling of ownership shares (with regard to equities), or taking on debts (with regards to bonds). This is done in order to raise more funds, with a probable promise of offering consistent profit to the shareholders and bondholders respectively.

 

Primary Market and Secondary Market - Len Academy

You can read on the advantages of inflation in economics here.

 

  • Secondary Market

In the secondary market, bonds and shares which had already been issued can again be traded by buyers and sellers through investment banks, or via the buyers locating the sellers, perhaps through a central market place, or an exchange over the counter. The stockbrokers and issuing houses are examples of the secondary market.

In simple terms, the secondary market deals with the buying and selling of old or existing securities that had already been issued.

You can attempt questions and answers in commerce here.

 

In comparison to a primary market, the operations of a secondary market is less restricted. In fact, they are considered as a second-tier securities market since existing securities are traded. Hence, they exist as an appendage (or attachment) to the primary market (stock exchanges and central banks).

The secondary market can be viewed to provide a continuous trading platform where investors can buy and sell securities at anytime during open market hours. This is quite different from the primary market where securities are open for subscription only for a limited period.

For the secondary market to function properly, the stock exchange must provide a platform for trading securities. Here, the sellers who own securities can interface directly with buyers. This will enable the sellers to easily sell their securities at a time that best suit them.

Please read key points for students in economics here.

 

Characteristics of Secondary Market

Below are some characteristics of the secondary market:

  • Buying and selling of securities take place continuously in the secondary market. This is quite different from the primary market where the purchase of securities are opened for a limited time.

  • There is no impact on the finances of corporations that issues securities. This is so since the trading actions (buying and selling) are carried out between the investors.

  • The price of securities in the secondary market are determined by the forces of demand and supply.

  • The secondary market provides more liquidity than the primary market. In this regard, high volume of securities are traded during the market's opening hours.

  • Existing investors can easily monetize their investments (in a corporation or company) through the secondary market.

You can read on commodity market here.

 

Types of Secondary Market

Generally, there are two types of secondary market. These are the auction market and dealer market respectively.

  • In the auction market, investors announce the price they are willing to buy and sell securities. Therefore, the initial investors will typically set profitable prices for their securities in this market.

  • The dealer market requires that dealers who had initially bought securities will eventually set the buy and sell prices of their securities. Having multiple dealers in this market may lead to a healthy competition.

Please read the concept of marketing and its branches here.

 

In essence, the primary and secondary market work quite differently towards achieving a similar goal. This goal is to serve as platforms that facilitate the trading of financial securities between buyers and sellers.

You can read on the concept and law of demand here.

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Amazing facts in Economics


Notable points in Economics

A unitary elasticity of supply is seen when a change in price brings about a corresponding and proportional change in the quantity of goods or services supplied.

The graph below shows a unit elasticity of supply:
Unit Elastic Supply Curve - Len Academy

Below is an instance of a unitary elasticity of supply:

  • If a 100% increase in the price of wheat translates into a 100% increase in the production and supply of wheat, then the supply elasticity is said to be unitary elastic and its value is equal to 1.

Unitary elasticity is always equal to 1, that is: Es = 1

The supply curve runs diagonally and will pass through the center.

Supply elasticity is defined as the rate at which an increase in price of goods translates into its increased production and availability in the market. Supply elasticity is also termed as price elasticity of supply.

Consider the statements below:

  • If a 100% increase in the price of rice translates into a 100% increase in the production and supply of rice, the supply elasticity is said to be unitary elastic and its value is equal to 1.

  • If a 100% increase in the price of rice translates into a 50% increase in the production and supply (quantity) of rice, the supply elasticity is said to be inelastic and its value will be greater than zero and less than 1. In this case, the exact value is 0.5: (value of change in the quantity of rice divided by value of change in price of rice = 50/100 = 0.5).

  • Please read on supply elasticity here

The individual demand schedule is a table that shows the demand of a commodity that an individual (consumer) purchased at various prices, and at a particular time.

The table below shows an individual demand schedule:

Price in Naira (of a tuber of yam)

Quantity demanded (per week)

500

5

400

10

300

15

200

20

100

25

The market demand schedule is also referred to as an aggregate demand schedule, total demand schedule or composite demand schedule.

This is a table that shows the different commodities purchased by all the consumers or customers in the market.

The market demand schedule is the summation of the individual demand schedules, showing the demand of different customers for a commodity at a particular price. It is shown in the table below:

Unit price of commodity (Naira)

Quantity demanded by consumer A (QA)

Quantity demanded by consumer A (QB)

Market demand (QA +  QB)

50

20

15

35

40

40

30

70

30

60

45

105

20

80

60

140

10

100

75

175

 

From the above table, notice that when the unit price of the commodity was 50 Naira, consumer A demanded 20 quantities while consumer B demanded 15 quantities.

Please read more on demand schedule here.

Below are definitions of demand from the perspective of some notable professors:

The demand for goods is a schedule of the amounts that buyers would be willing to purchase at all possible prices at any one instant of a time.

Professor Mayers

Demand is the various quantities of goods that would be purchased per time period at different prices in a given market.

Professor Hibdon

The demand for anything, at a given price is the amount of it which will be bought per unit of time at the price.

Professor Benham

Generally, demand is defined as the willingness of a person, buyer or consumer to buy a specific quantity of goods or service at a given price and time.

From the above definitions, we can infer that the definition of demand is referenced to three major factors. These are:

  1. Quantity of Goods Demanded

  2. Price

  3. Time

Please read more on the concept of demand here.