Market Types: Primary, Secondary, Third & Fourth Markets

Instructor: Natalie Boyd

Natalie is a teacher and holds an MA in English Education and is in progress on her PhD in psychology.

How are securities bought and sold? Though many people are familiar with exchange trades, that's not the only way trades can happen. In this lesson, we'll look at the four major capital markets and the trades made on each.

Capital Markets

Abdul is starting a new private investment firm. He wants to buy and sell stocks, bonds, and derivatives and make lots of money for his investors. But he's heard that there are many different ways he can buy and sell those things.

Abdul is hearing about capital markets, which are places where investment deals are made. These markets can be physical or virtual, but they all involve people or institutions buying and selling investments. A famous example of a capital market is the New York Stock Exchange, or NYSE.

There are many types of capital markets. To help Abdul understand the different types, let's take a look at the primary, secondary, third, and fourth capital markets.

Primary & Secondary

Recently, Abdul made a lot of money by investing in a company that was selling shares for the first time. The company sold shares to buyers like Abdul in an initial public offering, or IPO.

An IPO is one example of a primary market, which is when a company sells stocks or bonds to buyers. This can be as part of an IPO or a subsequent share offering. But whether the company has sold shares before or not, in the primary market, the shares on offer are always new shares.

In contrast, the secondary market is an exchange between equity holders. For example, if Abdul decides to sell the shares that he bought at the IPO, he might sell them to another investor. That would be an example of the secondary market. Whereas the primary market is made up of new shares of stocks or new bonds, the secondary market is resold equities. The company whose shares are being bought and sold doesn't have anything to do with trades on the secondary market unless they are buying back stock.

Equities on the secondary market can be bought and sold electronically, physically, or over-the-counter, or OTC. OTC trades are between two parties without including an equity exchange. For example, if Abdul's investment firm sells shares of a company to a private client without using the NYSE or other exchange, it would be an OTC trade.

Third & Fourth

For most investors, the primary and secondary markets are all they will ever encounter. But Abdul is starting an investment firm, so he also might encounter something call the third and fourth markets.

The third market occurs when exchange-listed securities are traded over the counter between non-exchange listed brokers and institutional investors. For example, if Abdul's investment firm buys stocks from a broker that is not affiliated with the NYSE or another exchange, they would be doing a deal in the third market.

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