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Lesson 1: Introduction

Introduction to Financial Markets

There are two types of markets in the United States equity market: primary and secondary markets. The primary market is where securities are created and the secondary market is where these securities are sold.

Primary

In the primary market, business organizations go from being privately held firms to publicly held firms by conducting an initial public offering (IPO).The firm conducting the IPO receives funds from selling shares of stock (a.k.a., equity) in their company to various purchasers. The firm then can then take those funds and use them for a wide variety of purposes, e.g., put it back into the business, buy down debt, etc.

Secondary

In the secondary market, shares of stock are sold by sellers and purchased by investors but the company itself does not receive any funds in a secondary market transaction.

Consider some examples. If Erin, an IBM stockholder, wants to sell 100 shares of her IBM stock in the secondary market, she would receive the proceeds of that sale, not IBM. If IBM, on the other hand, decides to offer additional shares of its company stock for sale, then IBM will receive the proceeds from that transaction. Both of these transactions would take place in the secondary market. The same would be true with a firm conducting its IPO. In the primary market, the new publicly traded company would receive the proceeds from the sale of its company stock.

The following video further explains what it means to buy a company stock. Click the white arrow to launch the video.

How Financial Markets Benefit Society

Financial markets benefit society by allowing corporations to issue shares of stock during an IPO to raise additional capital to both grow their business and benefit their stakeholders. The purchaser of the share of stock has the potential to see their investment grow and/or decline depending on a number of forces both external and internal to the firm, some of which we will cover in our course. If the management of a firm is ultimately successful, than society may benefit in the following ways:

  • An increase in wealth to corporation shareholders.
  • The corporation, with additional capital at its disposal, may choose to give back to the communities within which it does business.  

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