Sharekhan Blog

IPO vs Secondary Market: Which is Better for Investors?

  • Mar 9, 2024

However, what do these phrases actually mean? Which one offers investors a better return on their investment? So, let’s explore the IPO and secondary market in detail which will help you to make informed decisions.

What is an IPO?

The process through which a private business becomes public by making its shares initially available to the general public on a stock exchange is known as an IPO market or initial public offering. This gives the business the option to raise money from outside investors and gives its original shareholders a chance to sell their shares.

Advantages of IPO

  1. Possibility for Large profits: Since IPO equities are still in the process of being issued, there is a greater chance that they may grow and provide investors with larger profits.
  2. Access to Early-stage Companies: Investing in an initial public offering (IPO) gives you the chance to make investments in startups that have bright prospects.
  3. Information Disclosure to the Public: Businesses that go public are obligated to reveal their financial and operational data, giving investors greater transparency and simplifying the process of assessing the IPO investment.

What is a Secondary Market?

The secondary market is where share market investors trade existing shares, bonds, debentures, commercial paper, treasury bills, and so on. In this market, investors purchase and sell securities. A dealer market or an auction market may be the secondary market. Securities are traded through a stock exchange in the auction market. Over The Counter (OTC) is another term for the dealer market. This is the area where transactions take place off the stock exchange's platform.

The general public is initially given the opportunity to subscribe to the securities on the main market. Subsequently, the assets are listed for trade on a stock exchange. The secondary market with the most trading activity is the stock exchange. The Bombay Stock Exchange or BSE and the National Stock Exchange are the two important stock exchanges in India.


Advantages of Secondary Market

  1. Liquidity: By making it simple for investors to acquire and sell equities, the secondary market increases the liquidity of their investments.
  2. Investing in established companies:  Investing in well-established businesses having a good track record is possible through the secondary market, which has a lower risk than investing in initial public offerings (IPOs).
  3. Additional Details Available: Since these stocks have been trading for a while, investors have access to more information, enabling them to make well-informed investing decisions.

What is the Difference Between the Secondary Market and an IPO?

Aspect

Secondary Market

IPO (Initial Public Offering)

Definition

The secondary market is where previous issued securities are bought and sold by investors.

An IPO is the first sale of stock by a private company to the public.

Participants

Investors, including individuals and institutions, trade securities among themselves.

Typically involves institutional investors, underwriters, and the issuing company.

Seller

Existing shareholders or investors looking to sell their shares.

The issuing company sells shares directly to investors for the first time.

Purpose

Provides liquidity for investors to buy and sell existing securities.

Raises capital for the issuing company to fund growth and expansion.

Pricing

Prices of the shares are determined by supply and demand in the open market.

The initial price is set by the issuing company and underwriters based on market conditions and valuation.

Regulation

Governed by securities regulators to ensure fair and orderly trading.

Subject to extensive regulatory scrutiny and compliance requirements during the IPO process.

Risk

Generally lower risk compared to investing in IPOs, as securities have a track record.

Higher risk due to limited historical data and uncertainty about the company's performance in the public market.

Accessibility

Accessible to all types of investors through brokerage accounts.

Limited to institutional investors and high-net-worth individuals during the initial offering phase.

Market Dynamics

Prices fluctuate based on market sentiment, company performance, and economic factors.

Initial trading often experiences volatility as investors react to the company's prospects and valuation.

The Bottom Line

To make wise investment selections, investors must comprehend the distinctions between secondary markets and initial public offerings (IPOs). Each alternative has pros and cons of its own, and the ideal option for a given person will rely on their investing objectives and personal tastes.

So, be sure you are choosing the best course of action for your financial future; it is always advised to speak with a professional financial advisor before making any investment decisions. Thus, make informed investing judgments by doing your homework and weighing your possibilities.

Team Sharekhan
by Team Sharekhan

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