What is the difference between a primary market and a secondary market?

The correct answer highlights a fundamental principle of financial markets. The primary market is where new securities are issued and sold for the first time, allowing companies, governments, and other entities to raise capital directly from investors. This is typically done through mechanisms such as initial public offerings (IPOs) where new stocks are offered to the public or bond issuances where new debt securities are sold.

In contrast, the secondary market is where these existing securities are bought and sold among investors after the initial issuance. This segment of the financial market provides liquidity and marketability for the securities, as investors can sell their holdings to other market participants without involving the issuing companies.

This distinction is crucial for understanding how capital markets function and why both primary and secondary markets are essential for the operation of financial systems. The primary market facilitates capital formation, while the secondary market enables investors to manage their portfolios and realize gains or losses on their investments.