SIE Ready🔁 Market Structure · Lesson 1 of 4 · 4 min
Primary, Secondary, Third and Fourth Markets
🔁 When a company sells you new shares, it gets your money. When you buy those shares from another investor the next day, the company gets nothing. That one difference splits the whole market in two.
💡 Key idea
Primary market: the issuer raises money. Secondary market: investors trade with each other. Third market = listed securities traded OTC; fourth market = institutions trading directly.
🧠 Why it matters
In the primary market, an issuer sells new securities and receives the money: an IPO, a follow-on offering or a new bond issue. In the secondary market, investors trade already-issued securities among themselves; the issuer receives nothing. The secondary market has nicknames you must know. The first market is trading of listed securities on an exchange. The second market is over-the-counter (OTC) trading of securities that are not exchange-listed. The third market is OTC trading of exchange-listed securities, for example a dealer that trades NYSE-listed stock away from the exchange. The fourth market is institutions trading directly with each other, usually through electronic networks, without a broker-dealer in the middle. Memory line: 3rd = Listed stock OTC; 4th = Institution to Institution.
📈 In the real world
🏦 A pension fund needs to sell 400,000 shares of a large listed bank stock without moving the price. It matches the block directly with a mutual fund company through an electronic network, with no broker-dealer acting between them. That trade happened in the fourth market. The bank that issued the shares received nothing from it.
📌 Takeaways
- Primary = new issue, money goes to the issuer; secondary = investor-to-investor trading
- Third market: exchange-listed securities traded over the counter
- Fourth market: institutions trading directly with each other, without a broker-dealer
📖 Terms in this lesson
Primary market: Where issuers sell newly issued securities to investors, so the money raised goes to the issuer.
Secondary market: Where investors trade already-issued securities with one another; the issuer receives nothing from these trades.
Third market: Over-the-counter trading of exchange-listed securities, away from the exchange.
Fourth market: Institutions trading securities directly with each other, without a broker-dealer in between, usually through electronic systems.
PRIMARY PAYS THE ISSUER: Primary market proceeds go to the issuer; in the secondary market, money moves only between investors.
✅ Test yourself
In which transaction does the issuer receive the proceeds?
- A pension fund sells shares to an insurer
- An investor buys shares in an IPO
- An investor sells shares on an exchange
- A dealer buys listed shares OTC
Answer: B · An investor buys shares in an IPO
Only primary-market sales, such as an IPO, send money to the issuer. Exchange trades, OTC trades of listed stock (third market) and institution-to-institution trades (fourth market) are secondary-market trades between investors.
A broker-dealer trades a NYSE-listed stock over the counter. This is the
- third market
- fourth market
- primary market
- first market
Answer: A · third market
The third market is OTC trading of exchange-listed securities. The first market is trading on the exchange itself; the fourth market is institutions trading directly without a broker-dealer; the primary market is new issues.
Which describes the fourth market?
- Unlisted stocks quoted by market makers
- Listed stocks traded over the counter, away from the exchange
- New issues sold through an underwriter
- Institutions trading directly with each other
Answer: D · Institutions trading directly with each other
The fourth market is direct institution-to-institution trading, typically over electronic networks. Underwritten new issues are the primary market, unlisted stocks traded OTC are the second market, and listed stocks traded OTC are the third market.
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