2-4
FINANCIAL MARKETS AND INTEREST RATES
2) The investment banks also act as dealers by buying some of the
bonds themselves, then selling them to investors.
Primary and
secondary
markets
The original issue of bonds (or bills, or any other debt security) is
called the primary market issue. A secondary market also exists
where debt securities are bought and sold by investors. For example,
suppose an investor who bought HT Manufacturing bonds one year ago
has a change in investment plans and no longer needs 10-year bonds.
S/he can sell the bonds in the secondary market (usually with the
assistance of a broker) to another investor who wants 10-year bonds.
Because this transaction has no effect on HT Manufacturing's finances
or operations, it is considered a secondary market transaction.
Equity markets
Equity markets, also called stock markets, specialize in the buying and
selling of equity securities (stocks) of companies. As in the debt
markets, the equity markets have a primary and secondary market.
The primary market is where companies originally issue stock in their
companies, a process known as an initial public offering -- or "taking
the company public." Investment bankers advise a company on the
process and can also act as brokers and dealers for new stock issues.
The secondary market is where investors buy and sell stocks at prices
that reflect the investors' collective view of the future prospects of
each individual firm.
Derivative
markets
A derivative instrument is a security that derives its value from an
underlying asset, including financial assets such as stocks and bonds
or other assets such as commodities and precious metals. Derivative
instruments include future and forward contracts and options. These
instruments are bought and sold in the market by investors needing to
hedge risk exposure.