A founder takes her company public, a pension fund buys those shares from another investor a week later, and a market maker quotes a bid-ask spread on a thinly traded small-cap. Three different markets, three different mechanics, all under the umbrella of "public equity."
The primary market is where new shares are issued and capital flows from investors to the issuing company. The secondary market is where existing shares trade between investors, the issuer is not a party and receives no proceeds.
KEY: If the issuing company gets cash, it's primary. If only investors swap shares, it's secondary.
Primary market mechanisms:
- Initial Public Offering (IPO): a private company sells shares to the public for the first time, usually via an underwriting syndicate.
- Follow-on / Seasoned Equity Offering (FPO or SEO): an already-public company issues additional shares.
- Rights offering: existing shareholders receive the right to buy new shares pro rata, usually at a discount. Protects against dilution if exercised.
- Private placement: sale to a small number of accredited or institutional investors without full public registration.
Common mistakes
- Calling a follow-on offering a secondary market trade. A follow-on (FPO/SEO) is primary, the issuer receives cash. "Secondary" refers to investor-to-investor trading, not the sequence of issuances. Trap: "follow-on offering is secondary because it's not the first one."
- Equating off-exchange with OTC. Off-exchange typically refers to dark pools and ATSs trading exchange-listed securities. OTC refers to securities not listed on any exchange. Trap: calling Microsoft trades in a dark pool "OTC trading."
- Using shares outstanding instead of float. Float excludes insider, strategic, and treasury holdings. Modern cap-weighted indexes use float, not total shares. Trap: computing index weight with total shares outstanding when the question specifies a float-adjusted index.
Bottom line
- Primary market = issuer receives cash (IPO, FPO, rights). Secondary market = investors trade existing shares; issuer gets nothing.
- Firm commitment underwriting puts price/underpricing risk on the bank; best efforts leaves that risk with the issuer.
- Exchanges have central public order books and listing rules. OTC uses bilateral dealer networks for unlisted securities. Off-exchange (dark pools, ATSs) hides quotes pre-trade for listed stocks.
- Float = shares outstanding minus restricted shares (insider, strategic, treasury). ADV = total volume divided by days in the window.
Exam shortcut
For market type: "Issuer cash = primary, investor swap = secondary, no exceptions." For venue distinction: "Exchange = lit book, dark pool = hidden but listed, OTC = unlisted dealer market." For index weighting, remember PCEF: Price, Cap, Equal, Fundamental. Price-weighted is dominated by the highest-priced share, cap-weighted by the largest company, equal-weighted by no one (until it drifts), fundamental-weighted by accounting size.
The full lesson (about 2,088 words, 14 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- equity issuance and trading
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