Trading With Primary And Secondary Trends

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Trade With The Trend, But Which One?

Trading both sides of the chart is one way to super charge your trading. You can effectively increase the number of effective signals you get by simply opening yourself up to trading both bullish and bearish positions. I don’t mean you should be trading both at the same time, at least not on the same asset (unless your trading spreads), I mean you have to be open to taking either a bear or bull signal when one presents itself. This may also sound a bit like I am suggesting trading against the trend but that is not the case either. Think about it like this, every uptrend consists of a primary trend and a secondary trend. The primary trend is the longer term trend, whether it be a bull trend or a bear trend. Every primary trend is dotted with secondary trends, these are the consolidations, pullbacks, bounces and corrections that form as nearer term greed/fear briefly overpowers the longer term driver of the rally.

As traders we are taught to follow the trend in order to maximize profits. As binary traders we tend to focus on directional trades. This means, at least for me, I tend to focus on only using trend following signals and trend following trades. If the market was moving up I would trade calls, if down puts. If the signal was strong I would use short expiry, typically one week or shorter, and if the signal was week I would use a longer expiry, usually end of the month or one month. If the signal was not present, unclear or at the potential end of a movement I would also use longer expiry, in order to give the market time to “move on” from whatever it was that was causing the uncertainty. This method works well with binary but upon reflection I realized that I was only trading in line with trend about 66% of the time. What.

You Can Trade Against The Trend

Yes, it’s true. With the right approach you can trade against the trend. The strong signals and even the weak signals were paying off because they followed the primary and secondary trend. It was the uncertain signals and times of indecision that were the ones not profiting and it was because the secondary trend had changed. Take for example the chart below. There is a strong primary trend following signal that I would have a one week expiry on and followed up with additional one week trades. As the market moved up the indicators form divergences that point to a stall in the rally on at least a near to short term basis. At this time I would have switched to monthly expiry in order for the trades to weather the near term fluctuation but if you look here you will see that it didn’t pay off because 30 days after the peak the market was still trending sideways and at a 30 day low. An end of month may have worked depending on where I got in but it would have been dicey. The key here is that the market was still trending sideways 30 days later , this is because there was a change in trend that I was not taking advantage of.

The chart above shows only the long term primary trend. When the market reached a point of indecision switching to a longer term expiry makes sense but is not the best choice. The primary trend is still up but the secondary trend has changed so a change in tactic is also appropriate. The first and safest assumption is that the market has entered a near to short term consolidation range. By this I mean one that may last a few days to a few weeks. Look at the chart below. The secondary trend changes from up to sideways and that changes lasts for about 6 weeks. This means that during that time it will be possible to begin trading from both sides of the chart. When the asset reaches the top or a peak within the sideways trend puts are the right choice. When the asset reaches the bottom of the range or peaks within the sideways trend switching back to calls is the right thing to do. However, with a change in trend and trading tactic should also come a change in expiry.

Trades made against the primary trade should be shortened. They just won’t last as long because they are more likely to find support, at least in the near term, and be reversed. This is when I start using end of week, 3 day and end of day expiry. This is also a good idea when trading in line with the primary until the secondary trend moves back in line with it because you just don’t know how long the consolidation is going to last. Of course, as time goes on additional primary trend following signals will develop and at that time the longer term expiry can be employed; one month for the weaker signals and then one week once the signal becomes strong. Since making this revelation I have been able to improve my success rate dramatically. Now, instead of blindly making those longer term trades with the hope the market would move in time I change tactic with the secondary trend and capture more, profitable, trades.

A Look at Primary and Secondary Markets

The word “market” can have many different meanings, but it is used most often as a catch-all term to denote both the primary market and the secondary market. In fact, “primary market” and “secondary market” are both distinct terms; the primary market refers to the market where securities are created, while the secondary market is one in which they are traded among investors.

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Knowing how the primary and secondary markets work is key to understanding how stocks, bonds, and other securities trade. Without them, the capital markets would be much harder to navigate and much less profitable. We’ll help you understand how these markets work and how they relate to individual investors.

Key Takeaways

  • The primary market is where securities are created, while the secondary market is where those securities are traded by investors.
  • In the primary market, companies sell new stocks and bonds to the public for the first time, such as with an initial public offering (IPO).
  • The secondary market is basically the stock market and refers to the New York Stock Exchange, the Nasdaq, and other exchanges worldwide.

Primary Market

The primary market is where securities are created. It’s in this market that firms sell (float) new stocks and bonds to the public for the first time. An initial public offering, or IPO, is an example of a primary market. These trades provide an opportunity for investors to buy securities from the bank that did the initial underwriting for a particular stock. An IPO occurs when a private company issues stock to the public for the first time.

For example, company ABCWXYZ Inc. hires five underwriting firms to determine the financial details of its IPO. The underwriters detail that the issue price of the stock will be $15. Investors can then buy the IPO at this price directly from the issuing company.

This is the first opportunity that investors have to contribute capital to a company through the purchase of its stock. A company’s equity capital is comprised of the funds generated by the sale of stock on the primary market.

A rights offering (issue) permits companies to raise additional equity through the primary market after already having securities enter the secondary market. Current investors are offered prorated rights based on the shares they currently own, and others can invest anew in newly minted shares.

Other types of primary market offerings for stocks include private placement and preferential allotment. Private placement allows companies to sell directly to more significant investors such as hedge funds and banks without making shares publicly available. While preferential allotment offers shares to select investors (usually hedge funds, banks, and mutual funds) at a special price not available to the general public.

Similarly, businesses and governments that want to generate debt capital can choose to issue new short- and long-term bonds on the primary market. New bonds are issued with coupon rates that correspond to the current interest rates at the time of issuance, which may be higher or lower than pre-existing bonds.

The important thing to understand about the primary market is that securities are purchased directly from an issuer.

Primary Market

Secondary Market

For buying equities, the secondary market is commonly referred to as the “stock market.” This includes the New York Stock Exchange (NYSE), Nasdaq, and all major exchanges around the world. The defining characteristic of the secondary market is that investors trade among themselves.

That is, in the secondary market, investors trade previously issued securities without the issuing companies’ involvement. For example, if you go to buy Amazon (AMZN) stock, you are dealing only with another investor who owns shares in Amazon. Amazon is not directly involved with the transaction.

In the debt markets, while a bond is guaranteed to pay its owner the full par value at maturity, this date is often many years down the road. Instead, bondholders can sell bonds on the secondary market for a tidy profit if interest rates have decreased since the issuance of their bond, making it more valuable to other investors due to its relatively higher coupon rate.

The secondary market can be further broken down into two specialized categories:

Auction Market

In the auction market, all individuals and institutions that want to trade securities congregate in one area and announce the prices at which they are willing to buy and sell. These are referred to as bid and ask prices. The idea is that an efficient market should prevail by bringing together all parties and having them publicly declare their prices. Thus, theoretically, the best price of a good need not be sought out because the convergence of buyers and sellers will cause mutually agreeable prices to emerge. The best example of an auction market is the New York Stock Exchange (NYSE).

Dealer Market

In contrast, a dealer market does not require parties to converge in a central location. Rather, participants in the market are joined through electronic networks. The dealers hold an inventory of security, then stand ready to buy or sell with market participants. These dealers earn profits through the spread between the prices at which they buy and sell securities. An example of a dealer market is the Nasdaq, in which the dealers, who are known as market makers, provide firm bid and ask prices at which they are willing to buy and sell a security. The theory is that competition between dealers will provide the best possible price for investors.

The so-called “third” and “fourth” markets relate to deals between broker-dealers and institutions through over-the-counter electronic networks and are therefore not as relevant to individual investors.

The OTC Market

Sometimes you’ll hear a dealer market referred to as an over-the-counter (OTC) market. The term originally meant a relatively unorganized system where trading did not occur at a physical place, as we described above, but rather through dealer networks. The term was most likely derived from the off-Wall Street trading that boomed during the great bull market of the 1920s, in which shares were sold “over-the-counter” in stock shops. In other words, the stocks were not listed on a stock exchange, they were “unlisted.”

Over time, however, the meaning of OTC began to change. The Nasdaq was created in 1971 by the National Association of Securities Dealers (NASD) to bring liquidity to the companies that were trading through dealer networks. At the time, few regulations were placed on shares trading over-the-counter, something the NASD sought to improve. As the Nasdaq has evolved over time to become a major exchange, the meaning of over-the-counter has become fuzzier. Today, the Nasdaq is still considered a dealer market and, technically, an OTC. However, today’s Nasdaq is a stock exchange and, therefore, it is inaccurate to say that it trades in unlisted securities.

Nowadays, the term “over-the-counter” refers to stocks that are not trading on a stock exchange such as the Nasdaq, NYSE, or American Stock Exchange (AMEX). This generally means that the stock trades either on the over-the-counter bulletin board (OTCBB) or the pink sheets. Neither of these networks is an exchange; in fact, they describe themselves as providers of pricing information for securities. OTCBB and pink sheet companies have far fewer regulations to comply with than those that trade shares on a stock exchange. Most securities that trade this way are penny stocks or are from very small companies.

$13.4 trillion

The market cap of the New York Stock Exchange, the largest stock exchange in the world. Stock exchanges are considered to be part of the “secondary” market.

Third and Fourth Markets

You might also hear the terms “third” and “fourth” markets. These don’t concern individual investors because they involve significant volumes of shares to be transacted per trade. These markets deal with transactions between broker-dealers and large institutions through over-the-counter electronic networks. The third market comprises OTC transactions between broker-dealers and large institutions. The fourth market is made up of transactions that take place between large institutions. The main reason these third- and fourth-market transactions occur is to avoid placing these orders through the main exchange, which could greatly affect the price of the security. Because access to the third and fourth markets is limited, their activities have little effect on the average investor.

The Bottom Line

Although not all of the activities that take place in the markets we have discussed affect individual investors, it’s good to have a general understanding of the market’s structure. The way in which securities are brought to the market and traded on various exchanges is central to the market’s function. Just imagine if organized secondary markets did not exist; you’d have to personally track down other investors just to buy or sell a stock, which would not be an easy task.

In fact, many investment scams revolve around securities that have no secondary market, because unsuspecting investors can be swindled into buying them. The importance of markets and the ability to sell a security (liquidity) is often taken for granted, but without a market, investors have few options and can get stuck with big losses. When it comes to the markets, therefore, what you don’t know can hurt you and, in the long run, a little education might just save you some money.

Primary Market vs Secondary Market

Difference Between Primary Market vs Secondary Market

The primary market is where securities are created. It’s in this market that firms float new stocks and bonds to the public for the first time. An initial public offering, or IPO, is an example of a primary market. An IPO occurs when a private company issues stock to the public for the first time. The secondary market is commonly referred to as the stock market. The securities are firstly offered in the primary market to the general public for the subscription where a company receives money from the investors and the investors get the securities; thereafter they are listed on the stock exchange for the purpose of trading.

The financial market is a world where new securities are issued to the public regularly of varied financial products and services, tailored to the need of every individual from all income brackets. These financial products are bought and sold in the capital market, which is divided into the Primary Market vs Secondary Market. This is both distinct terms.

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Primary Market

The primary market refers to the market where securities are created, while the secondary market is one in which they are traded among investors. Various types of issues made by the corporation are a Public issue, Offer for Sale, Right Issue, Bonus Issue, Issue of IDR, etc. The company that brings the IPO is known as the issuer, and the process is regarded as a public issue. The process includes many investment banks and underwriters through which the shares, debentures, and bonds can directly be sold to the investors.

For example, company XYZ Inc. hires four underwriting firms to determine the financial details of its IPO. The underwriters detail that the issue price of the stock will be $20. Investors can then buy the IPO at this price directly from the issuing company. This is the first opportunity that investors have to contribute capital to a company through the purchase of its stock. A company’s equity capital is comprised of the funds generated by the sale of stock on the primary market.

Secondary Market

This includes the New York Stock Exchange (NYSE), NASDAQ and all major exchanges around the world. The defining characteristic of the secondary market is that investors trade among themselves. In this market existing shares, debentures, bonds, options, commercial papers, treasury bills, etc. of the corporates are traded amongst investors. The secondary market can either be an auction market where trading of securities is done through the stock exchange or a dealer market, popularly known as Over The Counter where trading is done without using the platform of the stock exchange.

For example, if you go to buy Amazon (AMZN) stock, you are dealing only with another investor who owns shares in Amazon. Amazon is not directly involved with the transaction.

While the primary market offers avenues for selling new securities to the investors, the secondary market is the market dealing in securities that are already issued by the company. Before investing your money in financial assets like shares, debenture, commodities, etc, one should know the difference between the Primary Market and Secondary Market, to better utilize savings.

Primary Market vs Secondary Market Infographics

Below is the top 10 difference between Primary Market vs Secondary Market:

Key Differences Between Primary Market vs Secondary Market

Both Primary Market vs Secondary Market are popular choices in the market; let us discuss some of the major Difference Between Primary Market vs Secondary Market:

  • The securities are initially issued in a market known as Primary Market, which is then listed on a recognized stock exchange for trading, which is known as a Secondary Market.
  • The prices in the primary market are fixed whereas the prices vary in the secondary market depending upon the demand and supply of the traded securities.
  • In the primary market, the investor can purchase shares directly from the company. In Secondary Market, investors buy and sell the stocks and bonds among themselves.
  • In the primary market, security can be sold only once, whereas in the secondary market it can be done an infinite number of times.
  • In the Primary Market the amount received from the securities are the income of the company, but in the Secondary Market, it is the income of investors.
  • The primary market is rooted in a specific place and has no geographical presence as it has no organizational setup. Conversely, the Secondary market is present physically, as a stock exchange, which is situated in a particular geographical area.
  • Investment bankers do securities trading in case of Primary Market. Conversely, brokers act as intermediaries while trading in the secondary market.

Head To Head Comparisons Between Primary market vs Secondary market

Below is the topmost Comparison between Primary Market vs Secondary Market:

Primary Market

The basis of Comparison Between Primary market vs Secondary market
Meaning A marketplace for new shares is Primary Market Place where formerly issued securities are traded is Secondary Market
Another name New Issue Market (NIM) After Market
Type of Purchasing Direct Indirect
Financing It helps to supply funds to budding enterprises and also to existing companies for expansion and diversification It does not provide funding to enterprises
How many times security can be sold? Only once Multiple times
Buying and Selling Buying & selling is between Company and Investors Buying & selling is only between Investors
Who will gain the amount on the sale of shares? Company Investors
Intermediary Underwriters Brokers
Price Fixed price Fluctuates depends on the demand and supply force
Organizational difference Not rooted in any specific spot or geographical location It has a physical existence

Primary Market vs Secondary Market – Final Thoughts

The two financial markets play a major role in the mobilization of money in a country’s economy. Primary Market encourages direct interaction between the companies and the investor while on contrary the secondary market is where brokers help out the investors to buy and sell the stocks among other investors. In the primary market bulk purchasing of securities does not happen while the secondary market promotes bulk buying.

This has a been a guide to the top difference between Primary Market vs Secondary Market. Here we also discuss the Primary Market vs Secondary Market key differences with infographics and comparison table. You may also have a look at the following articles to learn more –

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