The primary market and the secondary, third and fourth markets

Follow the securities and the proceeds

The primary market distributes newly issued securities. The issuer raises capital and receives offering proceeds, less applicable costs. An initial public offering is one example; a follow-on issue of new shares or a new bond issue also belongs to the primary market. An underwriter's participation does not turn a new issue into a secondary-market resale.

The secondary market trades existing securities. Sale proceeds go to the selling holder rather than supplying new capital to the issuer. A buyer's first purchase of a stock can therefore be a secondary-market transaction. Secondary trading supports liquidity and price discovery. Liquidity does not guarantee an immediate sale at the desired price.

Identify how existing securities trade

Secondary trading occurs on exchanges and over the counter. Listing describes a security; execution venue describes a trade. A listed security can trade away from its exchange.

• Third market: over-the-counter trading of exchange-listed securities. A dealer's off-exchange sale of existing listed shares from inventory fits this description.
• Fourth market: direct trading between institutions, without a broker serving as intermediary. A direct sale of existing shares from a pension fund to an investment fund fits this description.

An electronic trade is not necessarily fourth market, and institutional size alone does not establish direct trading. Over-the-counter trading does not necessarily involve unlisted securities.

Use the clues in order

First decide whether securities are newly issued or being resold. Next identify who receives the proceeds. For a more specific secondary-market label, look for listed securities traded over the counter or institutions trading directly. The four labels are not four consecutive stages that every security must pass through.