Market Structure

This page of our SIE Study Guide reviews the different types of capital markets.

Types of Markets

The Primary Market: The primary market refers broadly to newly created debt and equity securities. For example, companies will often generate cash by offering shares of ownership (stock) to public investors for the first time through initial public offerings (IPOs). The investment banks who underwrite these IPOs price the shares and then issue them directly to investors. It’s important to keep in mind that investors do not trade securities between each other in the primary market; they purchase securities directly from issuers.

The Secondary Market: Following an IPO, the shares of a publicly traded corporation are bought and sold during trading hours on stock exchanges like the New York Stock Exchange (NYSE) or Nasdaq. The secondary market (typically referred to as the stock market) facilitates these transactions in securities that are not sold directly by the issuer. Investors purchase securities from other investors through trading accounts held by brokerage firms such as Fidelity or Charles Schwab.

The Third Market: The third market facilitates the over-the-counter (OTC) trading of exchange-listed securities between institutional investors and broker-dealers. Investors who engage in third-market trading are able to bypass broker fees and the involvement of a formal exchange like the NYSE. OTC refers to trading that is done through a broker-dealer network rather than a centralized exchange; outside of the third market, securities that are traded OTC are typically not listed on an exchange.

The Fourth Market: Allows for institutional investors to trade large blocks of securities directly between each other. These trades are processed through the Electronic Communications Network (ECN) and can include both exchange-listed and OTC securities. Fourth market trading is permitted to occur after hours and does not carry any reporting requirements. Retail investors are unable to access this market.

Foreign Markets: Foreign markets provide investors with access to international securities, which are generally considered riskier than U.S. securities.

  • American Depositary Receipts (ADRs): Certificates that represent shares of a foreign company’s stock. Just like domestic shares, ADRs trade on stock exchanges in the United States and are priced in U.S. dollars rather than foreign currency.
  • Regulation S Offerings: An offering of securities by a U.S. or foreign corporation wherein the offering takes place outside of the United States and only non-U.S. investors participate. These offerings are exempt from SEC registration.

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