Primary, Secondary, and Derivatives market? (1 Viewer)

[Ilovecarrots]

Can someone please explain to me what the difference between the primary, secondary, and derivatives financial market? My teacher tried to explain it, but I'm not sure I fully understand. So primary is where the securities are issued, secondary is where it is traded and derivatives is...

Explain it to me in simple terms please.

Thank you!!!

 

[Godard]

So the primary financial market is where securities are first issued (e.g. a company sells shares on the stock market for the first time, at a price set by the company).

The secondary market is where people trade securities after the initial issuing of securities (e.g. people who bought shares when the company first issued them now want to sell them on the stock market, where price is determined by demand/supply).

The definition of financial derivatives is a bit more difficult, but a financial derivative is a contract to purchase an asset at a certain date (in the future) and at a certain price. So it is an agreement by a buyer to purchase derivatives with certain conditions set in place. Examples include: swaps, options and futures.

 

[Ilovecarrots]

So the primary financial market is where securities are first issued (e.g. a company sells shares on the stock market for the first time, at a price set by the company).

The secondary market is where people trade securities after the initial issuing of securities (e.g. people who bought shares when the company first issued them now want to sell them on the stock market, where price is determined by demand/supply).

The definition of financial derivatives is a bit more difficult, but a financial derivative is a contract to purchase an asset at a certain date (in the future) and at a certain price. So it is an agreement by a buyer to purchase derivatives with certain conditions set in place. Examples include: swaps, options and futures.

In the secondary market, do they sell it for the same price they bought it for, or is the price dependent on other factors? And why would they sell it if they're going to get more money at the end of the period?

Also I did not understand at all what you meant by derivatives :l

Are you saying that the derivative market is basically the secondary market but saying "I'm going to buy this asset in the future." If so, why don't they just buy it now? If the reason is not being able to afford it, how do they know they're going to be able to afford it in the future? If for some reason they don't have the money, are they obliged to buy it?



*From a confused future economist

 

[Godard]

In the secondary market, do they sell it for the same price they bought it for, or is the price dependent on other factors? And why would they sell it if they're going to get more money at the end of the period?

Also I did not understand at all what you meant by derivatives :l

Are you saying that the derivative market is basically the secondary market but saying "I'm going to buy this asset in the future." If so, why don't they just buy it now? If the reason is not being able to afford it, how do they know they're going to be able to afford it in the future? If for some reason they don't have the money, are they obliged to buy it?



*From a confused future economist

Ok, so for the secondary market, shares are sold at a price determined by demand/supply. Higher demand (more people who want to buy the shares), means higher price, less demand equals lower price. Some people may find that the share price has reached a reasonably high price and want to cash out by selling their shares. At other times, the share price may be dropping and people are scared they will lose money so they sell.

As for derivatives, it's a separate market from the secondary market (where there are many buyers and sellers who trade at the price determined by demand and supply). The derivatives market tends to require two interested parties to negotiate a deal. This is a good webpage explaining some of the intricacies of derivatives (see especially the example given under the "Common Forms of Derivatives" to answer your question about why someone doesn't buy it now: https://www.investopedia.com/terms/d/derivative.asp

 

[scarlettSmith]

According to ASX stock market news I have collected these information so that you can understand perfectly about the primary market vs secondary market.

Primary Market:

• Company can sell new stocks and bonds.
• Company can issue shares through the IOP's.
• Company can hire the investment bankers for large investors.
• No fixed location.

Secondary Market:

• Investor can buy and sell the securities by own.
• Small investors have good opportunity to buy and sell.
• Does not provide funding to companies.
• Fixed location.

 

[Trebla]

Think of derivatives as paper contracts designed for betting that an asset price will go a certain way.

Simple example - I bet you some money that a certain asset will be worth at least $100 tomorrow. If tomorrow it is $120 then I make a profit and you make a loss but if it turns out to be $90 then I make a loss and you make a profit. I don't physically own the asset but I made a bet that was 'derived' from the price of the asset (hence the term 'derivative').

Another (more realistic) example below to illustrate what derivatives are and how they work:

Suppose I'm a company who uses oil in my products and am worried about the volatility of oil prices in the next year or so. If I simply buy the oil directly off the market this time next year, I risk buying the oil too expensively than I would be comfortable with.

However, what I can do instead is negotiate with my 'wholesaler' that I want to lock in the price at say $70 a barrel when I buy the oil this time next year. If this is agreed upon, then a contract is written up (known as a forward contract) where I am guaranteed that price next year (think of it like a term deposit).

If this time next year, the oil price turns out to be $90 a barrel then that contract worked in my favour BUT if it was $50 a barrel instead then I lose out (as I could have gotten it cheaper at $50 directly from market rather than the $70 in my contract). However, the benefit of the contract was that it removed the uncertainty of not knowing what price I will pay for the oil in the future.

However, the contract itself is also worth money. If the oil price is likely to tank below $70 then then a contract locking in a more expensive price may be worthless to someone else - but if the oil price soars above $70 instead then someone may be willing to pay some good money for the contract due to cheaper price locked in the contract (FYI there is a whole branch of mathematics dedicated to pricing derivatives).

Hence, I can sell that contract (before it matures of course) to someone else who is willing to buy it and I can potentially make a profit if the oil price works in my favour.

Now, if you imagine the many variations of this example (e.g. on other assets) and more complicated contract arrangements (e.g. futures, options, CDOs) on a large scale then you have an entire market trading these contracts. This is the derivatives market.

 

[scarlettSmith]

Think of derivatives as paper contracts designed for betting that an asset price will go a certain way.

Simple example - I bet you some money that a certain asset will be worth at least $100 tomorrow. If tomorrow it is $120 then I make a profit and you make a loss but if it turns out to be $90 then I make a loss and you make a profit. I don't physically own the asset but I made a bet that was 'derived' from the price of the asset (hence the term 'derivative').

Another (more realistic) example below to illustrate what derivatives are and how they work:

Suppose I'm a company who uses oil in my products and am worried about the volatility of oil prices in the next year or so. If I simply buy the oil directly off the market this time next year, I risk buying the oil too expensively than I would be comfortable with.

However, what I can do instead is negotiate with my 'wholesaler' that I want to lock in the price at say $70 a barrel when I buy the oil this time next year. If this is agreed upon, then a contract is written up (known as a forward contract) where I am guaranteed that price next year (think of it like a term deposit).

If this time next year, the oil price turns out to be $90 a barrel then that contract worked in my favour BUT if it was $50 a barrel instead then I lose out (as I could have gotten it cheaper at $50 directly from market rather than the $70 in my contract). However, the benefit of the contract was that it removed the uncertainty of not knowing what price I will pay for the oil in the future.

However, the contract itself is also worth money. If the oil price is likely to tank below $70 then then a contract locking in a more expensive price may be worthless to someone else - but if the oil price soars above $70 instead then someone may be willing to pay some good money for the contract due to cheaper price locked in the contract (FYI there is a whole branch of mathematics dedicated to pricing derivatives).

Hence, I can sell that contract (before it matures of course) to someone else who is willing to buy it and I can potentially make a profit if the oil price works in my favour.

Now, if you imagine the many variations of this example (e.g. on other assets) and more complicated contract arrangements (e.g. futures, options, CDOs) on a large scale then you have an entire market trading these contracts. This is the derivatives market.

Impressed with your research
For investment in oil industry you may have follow oil price forecast also. This strategy will help you to invest in every sector.

 

[seremify007]

Hence, I can sell that contract (before it matures of course) to someone else who is willing to buy it and I can potentially make a profit if the oil price works in my favour.

Now, if you imagine the many variations of this example (e.g. on other assets) and more complicated contract arrangements (e.g. futures, options, CDOs) on a large scale then you have an entire market trading these contracts. This is the derivatives market.

And let's not forget the difference between OTC (over the counter) vs exchange traded derivatives. I believe the latter is what "derivatives market" is referring to in this context of HSC Economics (but it should in theory cover everything).