What is the difference between primary and secondary markets?

The distinction between primary and secondary markets is fundamental to understanding how financial markets operate. In primary markets, new securities are created and issued for the first time, allowing companies and governments to raise capital. This process includes activities such as initial public offerings (IPOs) where shares of a company are sold to investors directly from the issuer, ensuring that the funds raised go directly to the entity that needs the capital.

On the other hand, secondary markets facilitate the trading of existing securities among investors. Once securities have been issued in the primary market, they can be bought and sold multiple times in the secondary market. This provides liquidity for investors, allowing them to sell their securities to others without the issuer needing to be involved or receive any additional funds from these transactions.

Understanding this distinction helps clarify how capital flows through the financial system and how investors can access liquidity. The other options present misconceptions or inaccurate statements regarding the nature and purpose of these markets.