1.2.  Important Definitions in the Securities Industry

Before we go any further, there are a few things you need to know in order to understand how securities are traded in the public markets. First, 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, mall or website—the term “primary market” just refers to the fact 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 (IPO). If a company issues more shares after an IPO, it is referred to as a follow-on 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. A secondary offering, or secondary distribution, is the sale of securities by existing holders, such as insiders, institutional investors, or venture capitalists. The shares in a secondary offering have already been issued and are outstanding. While most issues of securities are subject to federal regulations, m