CFA Level I Exam · Equity Issuance and Trading

Primary vs Secondary Equity Markets for CFA Level I

Updated 7 October 2026 · Fact-checked

The primary market is where a company sells new shares and receives the cash, through an IPO, follow-on offering, rights issue or private placement. The secondary market is where investors trade existing shares with each other, so the company receives nothing. To solve questions, ask who gets the money.

Understand Primary vs Secondary Equity Markets

A company needs capital to grow. One way is to sell ownership, which means issuing shares. The primary market is where this sale happens. The issuer creates new shares, investors pay for them, and the cash goes to the company (less issue costs).

After the sale, investors want to sell or buy shares without involving the company. This happens in the secondary market, such as an exchange or an alternative trading system. Here, money moves from buyer to seller. The issuer's share count and cash do not change. Secondary markets matter to the primary market because liquidity and a visible price make investors more willing to buy new issues.

There are several ways to issue equity. An initial public offering (IPO) is the first sale of shares to the public by a private company, so the shares then become listed. A follow-on offering (also called a seasoned equity offering) is a later sale of new shares by a company that is already public. A rights issue is a follow-on offering made first to existing shareholders, who receive rights to buy new shares in proportion to their holdings, often at a discount. This protects them from dilution of their ownership percentage.

A private placement sells shares directly to a small group of qualified or institutional investors, not to the general public. It is usually faster and cheaper, with less disclosure, but the shares are less liquid because resale is restricted. A public offering is open to the public and needs a full registration or prospectus process.

Issuers usually use an investment bank (the underwriter). In a firm commitment (underwritten) deal, the bank buys the whole issue and resells it, so it bears the price risk. In a best-efforts deal, the bank only tries to sell and the issuer bears the risk. Shares can also be sold by shelf registration (registered once, sold in portions later), and by a direct listing, where existing shares are listed without raising new capital.

Key formulas to remember

Primary vs secondary test: Primary: new shares issued, cash goes to issuer. Secondary: existing shares change hands, cash goes to the selling investor; Use this first to classify any transaction.
Rights issue: theoretical ex-rights price: Ex-rights price = (N × P + n × S) ÷ (N + n); N = existing shares, P = price before the issue, n = new shares issued, S = subscription price. Assumes the issue proceeds are valued fairly and no other news.
Value of one right: Value of a right = cum-rights price − ex-rights price = (P − S) ÷ (N_old + 1); P is the cum-rights price, S is the subscription price, and N_old is the number of existing shares (rights) needed to buy one new share. Example: 5 rights buy 1 new share, so (20 − 14) ÷ (5 + 1) = $1.00, which matches 20 − 19.
Net proceeds to issuer: Net proceeds = shares sold × offer price − underwriting spread − other issue costs; In a firm commitment deal the underwriter pays the issuer the offer price less the spread.
IPO first-day return (underpricing): Underpricing = (first-day close − offer price) ÷ offer price; A positive value means the shares were underpriced relative to the first trading price.

How to solve Primary vs Secondary Equity Markets questions

Use this order for any question on equity issuance and market types.

1Decide whether new shares are created or existing shares simply trade. New shares mean primary market; existing shares mean secondary market.
2Identify the issuer's status: private company means IPO or private placement; already listed means follow-on, rights issue or private placement.
3Check who the buyers are: the general public points to a public offering; existing shareholders first points to a rights issue; a few institutions points to a private placement.
4Check who bears the risk: firm commitment puts price risk on the underwriter; best efforts leaves it with the issuer.
5For numbers, compute total proceeds, subtract the spread and costs, then divide by shares if needed.
6For a rights issue, use the ex-rights price formula, then the value of a right.
7Match your result to the three options and eliminate the two that fail the primary or secondary test.

Quickest way: Who gets the cash?

When to use it: Use this on any conceptual question that asks you to classify a transaction or compare issuance methods.

Ask: does the company receive the money? If yes, primary. If no, secondary.
Ask: is the company already listed? If no and shares are offered publicly, IPO.
Ask: are existing holders offered first? If yes, rights issue.
Ask: is it a small group of investors with limited resale? If yes, private placement.
For rights math, write N, P, n, S and plug into the ex-rights formula without re-deriving it.

Common mistakes in Primary vs Secondary Equity Markets

Saying the issuer receives cash when shares trade on an exchange.
Candidates link any share purchase with the company raising money.
Fix: Only a primary market sale gives the issuer cash. Exchange trading after listing is secondary and moves money between investors.
Treating an IPO and a follow-on offering as the same thing.
Both issue new shares to the public.
Fix: An IPO is the first public sale by a private company. A follow-on is by a company already public, also called a seasoned equity offering.
Forgetting that a rights issue is aimed at existing shareholders.
It is confused with an ordinary public follow-on.
Fix: A rights issue gives current holders the first right to buy in proportion to holdings, which limits dilution of their ownership.
Assuming a private placement offers high liquidity and full disclosure.
Candidates think of it as a normal share sale.
Fix: Private placements are faster and cheaper but have lighter disclosure and restricted resale, so the shares are less liquid.
Mixing up who bears risk in firm commitment and best-efforts deals.
Both involve an underwriter.
Fix: Firm commitment: the underwriter buys the issue and bears the risk. Best efforts: the underwriter only tries to sell, and the issuer bears the risk.
Using the wrong share count in the ex-rights price.
The new shares are left out of the denominator.
Fix: The denominator is old shares plus new shares. The numerator is old value plus new cash raised.

Worked examples

Example 1

A listed company has 10 million shares trading at $20. It offers a rights issue of 2 million new shares at a subscription price of $14. What is the theoretical ex-rights price? (A) $18.00 (B) $19.00 (C) $20.00

Show the solution

Value before the issue = 10 million × $20 = $200 million.
Cash raised = 2 million × $14 = $28 million.
Total value after = $200 million + $28 million = $228 million.
Total shares after = 10 million + 2 million = 12 million.
Ex-rights price = $228 million ÷ 12 million = $19.00.
Check: option C equals the old price, so it ignores the dilution. The ex-rights price must fall between $14 and $20, and $19.00 does.

Answer: (B) $19.00

Example 2

Which transaction is a primary market transaction? (A) An investor sells 500 shares of a listed bank to another investor on an exchange. (B) A listed software company sells new shares to institutional investors in a private placement. (C) A fund sells its shares of a listed retailer through a broker.

Show the solution

Apply the test: do new shares get created and does the company receive the cash?
Option A moves existing shares between two investors, so it is secondary.
Option C is also existing shares changing hands, so it is secondary.
Option B creates new shares and the company receives the proceeds, so it is primary even though it is not a public offering.

Answer: (B) The private placement is a primary market transaction.

Exam tips

Start every classification question with 'does the issuer receive the cash?' It removes two options quickly.
Learn the exact vocabulary: seasoned equity offering equals follow-on offering, and both mean new shares from an already listed company.
A private placement is still primary. Do not rule it out because it is not public.
For rights issue maths, check that your ex-rights price lies between the subscription price and the old price. If not, you made an error.
With no penalty for wrong answers, always answer, but guess only after eliminating options that fail the primary or secondary test.

Practice questions from Equity Issuance and Trading

Primary vs Secondary Equity Markets in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Primary vs Secondary Equity Markets: frequently asked questions

What is the difference between primary and secondary equity markets?

In the primary market a company issues new shares and receives the proceeds. In the secondary market investors trade existing shares among themselves, and the company gets no cash from those trades.

What is the difference between an IPO and a follow-on offering?

An IPO is the first sale of shares to the public by a private company. A follow-on offering is a later sale of new shares by a company that is already listed, and it is also called a seasoned equity offering.

What is a rights issue?

It is a follow-on offering where existing shareholders receive the right to buy new shares, often at a discount, in proportion to their holdings. It helps them avoid dilution of their ownership percentage.

How does a private placement differ from a public offering?

A private placement sells shares to a small group of qualified or institutional investors with less disclosure and restricted resale. A public offering is open to the general public and needs full registration, so it costs more but gives more liquidity.