What differentiates primary markets from secondary markets?

Primary markets are where new securities are originally issued to investors. This process often occurs through initial public offerings (IPOs) when a company offers its shares to the public for the first time. The key characteristic of primary markets is that they facilitate the creation of new financial instruments, allowing issuers—such as corporations or governments—to obtain capital directly from investors.

In contrast, the secondary market is where existing securities are traded among investors after their initial issuance. This market provides liquidity, allowing investors to buy and sell securities without involving the issuing company. The distinction is vital because it underlines how capital flows from issuers to investors and how ownership changes hands in the market.

The other options, while mentioning different aspects of these markets, do not accurately define the critical difference between primary and secondary markets. For example, stock buybacks are related to secondary market activities, not to the initial issuance of securities. The assertion that secondary markets are restricted to institutional investors is misleading, as they involve both institutional and retail investors. Finally, the idea that secondary markets only involve bond trading is incorrect; they encompass a wide variety of securities, including stocks. Thus, understanding that primary markets are focused on the issuance of new securities clarifies the fundamental distinction from secondary markets.