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financial market is created to satisfy preferences of market participants
financial market is created to satisfy preferences of market participants. (10 Marks) a. Distinguish the difference between primary and secondary markets. Support your answer by using examples. b. Distinguish the difference between money markets and capital markets. Support your answer by using examples.
Expert Solution
Difference between Primary and Secondary market
|
Primary market |
Secondary market |
|
|
Also called as |
New Issue Market (NIM) |
After Issue Market (AIM) |
|
Role of the market |
Market where stocks are issued for the first time |
Market where stocks are traded once issued |
|
Intermediaries |
Investment banks |
Brokers |
|
Sale of securities |
Directly by companies to investors |
Sold and purchased amongst investors and traders |
|
Price of shares |
Fixed at par value |
Changes depending on the supply and demand of shares |
Example of Primary market
For example, company ABCWXYZ Inc. hires five underwriting firms to determine the financial details of its IPO. The underwriters detail that the issue price of the stock will be $15. Investors can then buy the IPO at this price directly from the issuing company.
This is the first opportunity that investors have to contribute capital to a company through the purchase of its stock. A company's equity capital is comprised of the funds generated by the sale of stock on the primary market.
Example of Secondary market
For example, if you go to buy Amazon (AMZN) stock, you are dealing only with another investor who owns shares in Amazon. Amazon is not directly involved with the transaction
B)
| BASIS FOR COMPARISON | MONEY MARKET | CAPITAL MARKET |
|---|---|---|
| Meaning | A segment of the financial market where lending and borrowing of short term securities are done. | A section of financial market where long term securities are issued and traded. |
| Nature of Market | Informal | Formal |
| Financial instruments | Treasury Bills, Commercial Papers, Certificate of Deposit, Trade Credit etc. | Shares, Debentures, Bonds, Retained Earnings, Asset Securitization, Euro Issues etc. |
| Institutions | Central bank, Commercial bank, non-financial institutions, bill brokers, acceptance houses, and so on. | Commercial banks, Stock exchange, non-banking institutions like insurance companies etc. |
| Risk Factor | Low | Comparatively High |
| Liquidity | High | Low |
| Purpose | To fulfill short term credit needs of the business. | To fulfill long term credit needs of the business. |
| Time Horizon | Within a year | More than a year |
| Merit | Increases liquidity of funds in the economy. | Mobilization of Savings in the economy. |
| Return on Investment | Less | Comparatively High |
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