Section 8.1 – Primary and Secondary Markets

The primary market is where new securities are issued and sold for the first time.
The issuer (the company, government, or municipality) is the seller in this market.
Purpose: To raise capital so companies can grow their business and share that growth with investors.
Example: When a company conducts an IPO (Initial Public Offering) — it’s selling new shares directly to investors.

The secondary market is where existing securities are bought and sold between investors.
The issuer does not receive money from these transactions.
The secondary market provides liquidity, allowing investors to easily buy and sell securities.
Without a strong secondary market, investors would be less likely to buy new issues (making it harder for companies to raise capital in the primary market).

The Securities Exchange Act of 1934 regulates the trading of securities in the secondary market.
The 1934 Act created the SEC (Securities and Exchange Commission) and granted it authority to regulate:
- Securities exchanges
- The OTC (Over-the-Counter) market
- Broker-dealers and their activities

Exchanges – Physical or electronic marketplaces (e.g., NYSE) where securities are listed and traded.
Over-the-Counter (OTC) Market – Decentralized market for securities not listed on an exchange.
Third Market – Exchange-listed securities traded OTC by institutional investors.
Fourth Market – Direct institution-to-institution trading without broker-dealer involvement, often through electronic networks (ECNs).

Members of the exchange perform trading activities.
Floor Brokers: Execute trades for their firm and its customers.
Designated Market Makers (DMMs):
- Assigned specific stocks to manage.
- Maintain an inventory of their assigned securities.
- Facilitate trades and help ensure fair and orderly markets by buying and selling from their own inventory as needed.
Auction Market (Double Auction Market):
- Buyers and sellers compete by posting bids (buy offers) and asks (sell offers).
- The best bid meets the best offer — a trade occurs.
Other Exchange Members:
- Floor Traders – Trade for their own accounts.
- Two-Dollar Brokers – Independent brokers who assist floor brokers when trading volume is high.

Markets

To raise new capital for companies and allow investors to share in their growth.
The issuer of the security.
Existing securities between investors.
The Securities Exchange Act of 1934.

Exchanges, Over-the-Counter (OTC) Market, Third Market, and Fourth Market.
To maintain a fair and orderly market by managing inventory, facilitating trades, and providing liquidity.
An auction or double auction market.
Stocks that trade on an exchange (e.g., NYSE-listed securities).