A firm raises equity capital by selling stocks in a market.Similarly, investors who holds stocks need market to trade them. Thus, a market is must for both issuing new stocks and trading outstanding stocks. The market for common stock can be divided into two types as primary market and secondary market.
1. Primary Market
Newly established firm, privately held firms as well as publicly owned firms issue securities in primary market. In a primary market,securities issued for the first time are traded. In other words, it is a 'new issue' market, where fund is raised through the sale of new securities to the investors. Primary market can be classified in to two types as follows:
i. New public offering by closely held firms
A closely held firm can raise fund through initial public offering which is also a major part of primary market. If a new firm is growing, usually the owners will want to take the company public with a sale of common stock to outsiders. This activity is known as going public. In other words, whenever stock in a closely held company is offered to the public for the first time, the company is said to be going public. The market for the stock that is just being offered to the public is called the initial public offering (IPO) market.
ii. Additional shares sold by established publicly owned companies
An established, publicly owned company can sell additional shares in the primary market. It is possible if the number of issued shares are less than number of authorized shares.
2. Secondary Market
Well established and publicly owned companies' outstanding shares are actively traded in secondary market. Secondary market deals in existing securities, as opposed to newly issued securities. The company does not receive money when stocks are traded in this market. The purpose of this market is to maintain liquidity in the stocks. Common stocks of small companies are not actively traded. They are owned by only a few people. Such companies are called closely held companies and their stocks are called closely held stocks. In contrast, the stocks of larger companies are owned by a large number of investors and are called publicly held stocks. Such companies are called publicly held companies. Stocks of smaller publicly companies and closely held companies are traded in the over-the-counter (OTC) market. But the stock of larger publicly owned companies are generally traded on a organized stock exchange.
