Important Definitions in the Securities Industry

There are a few things you need to know in order to understand how securities are traded. First, the term “securities trading” refers to buying and selling securities, not swapping them. Second, before a security can be traded, it must be issued to the public through what is called the primary market. There is no actual “primary” market—no primary stock exchange or mall or website—the term primary market just refers to the idea that a security must first be issued to the public, hence the word primary.

In order to sell securities to the public, issuers (companies) usually use the services of an investment bank, also known as an underwriter. The investment bank purchases securities from the issuer at a discount and then sells them to investors in a primary offering. The difference between the price at which the investment bank purchases the securities from the issuer and the higher price at which the investment bank sells the securities to investors is called the underwriting spread. The underwriting spread is the money the underwriter makes in the transaction.

For a stock offering (equity), an issuer can be a company or some other private entity, but for a debt offering, as we learned earlier, the issuer can be a company or a municipality or even a national government.

The first time a company issues and sells stock to the public, it is called an initial public offering, or IPO. If a company issues more shares after an IPO, it is referred to as a follow-on offering, or secondary offering. Both IPOs and follow-on offerings are considered part of the primary market because the issuer (the company) is receiving the proceeds from the sale of the shares.

After a security has been issued, it may be bought and sold by investors. This trading between investors takes place in the so-called secondary market. There is no actual “secondary market”—like primary market, it is simply