Within the capital market, where companies raise funds and investors trade securities, there are two specific sub-categories: primary market and secondary market.
Just as with traditional finance, the different characteristics of the two markets also have an impact on the security token-based financial and investment system.
Let’s see them, specifically.
The primary market is where securities are created and made available to the public for the first time. Generally, the objective of the primary market is to raise funds from the company offering the security in order to meet the long-term capital requirement.
Issues can be made in various forms such as crowdfunding or IPO or, in the case of the use of a Blockchain to eliminate bureaucracy while following the principles of transparency and security, STO.
Thus, the primary market provides funding to both new and old companies for their expansion and diversification, even though the securities can only be sold once.
In the secondary market, on the other hand, securities (such as shares, bonds, options, treasury bills and, therefore, also security tokens) already exist and are traded among investors.
Specifically, the secondary market mostly involves investors who trade previously issued securities, without the involvement of the issuing companies, in order to liquidate an investment.
While, to a lesser extent than the investor, it is the involvement of the issuer that could launch a secondary offer to raise additional capital.
The secondary market facilitates the liquidity and marketability of existing securities. It also ensures true and fair trading to protect the investor's interes
Security tokens and differences between the two financial market
As previously stated STOs can be positioned at different stages of the corporate life cycle.
Only the launch phase foresees the emission of new security tokens, therefore, re-entering the primary market. All the other phases, instead, occur in the secondary market.
In general, as for any other security token, the security tokens live in the same way the difference between primary and secondary market.
Here are some key differences:
prices: security is issued at a fixed price in the primary market, while in the secondary market, the price of security varies according to supply and demand;
place of purchase: in the primary market, security can be purchased directly by the company, while in the secondary, investors buy and sell the securities to each other on dedicated platforms;
beneficiaries: in the primary market, it is the company that benefits from the sale of the securities, while in the secondary market, it is the investor;
number of sales: in the primary market, the securities can be sold only once, while in the secondary market, trading on the securities can take place an infinite number of times.
The two financial markets play an important role in mobilising capital for the economy, also in the world of security tokens.
While the primary market encourages direct interaction between the company and the investor, the secondary market becomes the place where intermediaries support trading for the benefit of investors.
Thanks to the tokenization of assets, EDSX intervenes as a place to exchange security tokens by supporting business and investors in their fundraising objectives in the primary market and capital increase in the secondary market.