Does technical jargon put you off investing? If so, you’re not alone. Many people avoid investing because of the confusing financial language – but it could be having a negative impact on your long-term wealth. Catalist aims to give everyone equal access to investment opportunities, so we’re helping to demystify some of the jargon you might come across when considering investments. This week we’re considering primary vs secondary markets.
We’ve previously talked about how shares, debt securities (such as bonds) and listed managed funds are different types of “financial products” you can invest in. The primary and secondary markets are where you can buy these financial products.
The primary market is where new financial products are issued and offered for sale for the first time, such as through an initial public offering (IPO) – where a business is also joining a public stock exchange for the first time.
The business that is issuing the new financial products is the seller, so in a primary market transaction the business receives the money from the sale. This is known as a “capital raise” – where a business sells new shares or debt securities to raise money in order to grow or finance business activities.
The secondary market is where previously issued financial products are traded, with investors trading amongst themselves rather than buying directly from the issuer. The business doesn’t receive any money from secondary market transactions, because it is not the seller. However, the business is still interested to see investors are trading for a reasonable price, because this will affect the price at which additional financial products can be issued in the primary market in future.
A stock market or stock exchange is a venue where buyers and sellers are matched, subject to fair and transparent rules. A stock exchange like the NZX, or Catalist, can be used for both primary market and secondary market transactions, meaning the primary and secondary markets are not necessarily different physical venues, often operating within a single venue. Businesses can sell new financial products on a stock exchange, but most transactions are generally secondary market transactions, where investors trade existing financial products.
Often, when large public companies on the NZX issue new shares or debt securities, individual investors are unable to buy them in the primary market, as priority is given to large institutional investors who are able to buy larger quantities at one time. Prices are typically more volatile in a primary market because demand for the securities can be hard to predict – hence why the price may be set lower than subsequent secondary market trading. This can disadvantage smaller investors who don’t have the opportunity to buy at the lower prices.
IPOs have been on the decline in New Zealand in recent years, despite the relatively impressive performance of the NZX and a slight increase in listing activity at the end of 2020. The NZX is often said to be losing out to the ASX, which is actively marketing to and listing New Zealand businesses.
Some experts say that markets need small and mid-sized brokers and investment bankers to bring smaller businesses to the market – and we have a relatively low number of these, in comparison to other markets. This may further restrict smaller businesses from listing on the NZX.
Some of these challenges and opportunities were explored in the Growing New Zealand’s Capital Markets report released last year. One of the key trends was recognition that we effectively have a two-tier public market, which is working well for our larger businesses, but is less liquid and effective for smaller businesses. Recommendations include increasing the development of the growth capital industry in New Zealand – and promoting new listings through better education of the different pathways to the listed market.
As noted in the report, there is more capital availability from sources such as angel investment groups and private capital (both globally and locally). However, there seems to be a disproportionate gap in funding for capital raises of between $2 – 10 million. Minister of Small Business, Hon Stuart Nash, recently confirmed that a team at the Ministry of Business, Innovation and Employment was looking at the issue. Nash said that about 30,000 businesses had annual revenue of between $3 million and $30m and employed between six and 40 staff but found it difficult to get the capital they needed to expand.
The creation of new marketplaces and exchanges, known as ‘steppingstone’ markets, to help these businesses access capital has been an idea that has been around for over a decade, and was incorporated into New Zealand law when it was updated in 2013. These steppingstone markets will help to grow our smaller businesses to a size where they can consider an IPO on a market like the NZX. The report specifically mentions MyCap Markets (Catalist’s former name) as being part of this solution.
Interested in more information on how Catalist can help your business raise capital in a primary market – or facilitate trading for your investors in a secondary market? Register your interest today.
By Michelle Polglase