What are "primary markets" and "secondary markets"?

Primary markets are where new securities are issued and sold for the first time to investors. This process includes initial public offerings (IPOs) where companies offer their stocks publicly for the first time. The capital raised in the primary market goes directly to the issuing company, allowing them to fund operations, expansion, or pay debts.

Secondary markets, on the other hand, involve the buying and selling of existing securities. Once the securities have been sold in the primary market, they can be traded among investors in the secondary market without any new funds going to the issuing company. This market provides liquidity, allowing investors to easily enter and exit positions in their investments.

The correct answer highlights the fundamental distinction between these two types of markets, emphasizing the role of the primary market in issuing new securities and the secondary market's focus on trading already existing securities. This differentiation is crucial for understanding how financial markets operate and the flow of capital within the economy.