Behind the numbers... / The primary and secondary markets
The primary and secondary markets
When a company is in need of funds to expand, it can put part of its company capital up for sale, a process known as an IPO or I (Initial Public Offering) and governed by strict transparency rules. Such offerings take place on the primary market. This is the only moment when the company actually obtains funds. Afterwards, on the secondary market, it does not benefit at all from any share trading among investors. This is how the Stock Exchange finances the economy , allowing the holders of a company’s capital to pool their risks.
The transition from the primary market to the secondary market takes place immediately: once a “new” security has been issued and listed, it becomes available on the secondary market. The secondary market is in fact what is commonly known as the stock market. Shares are traded between investors at varying prices. These reflect not just how well the issuing company is doing, but also its future prospects as seen by investors. The stock market is thus a sort of time machine, enabling investors to travel into the future. Trading in securities allows the stock market to ensure the liquidity and mobility of savings.
Buying and selling are done via an electronic platform known as an “order book” – see opposite – which records the 5 best (sell) offers and the 5 best (buy) offers for a security. The balance between these two positions determines its price (the quotation).
Order books are managed by stock exchanges (for instance Euronext Brussels). Private individuals have no direct access to an order book, and they have to place their orders with a broker or a bank at which they hold a “share account”.