Introduction
Capitalism operates through markets. In an ideal scenario, goods and capital move freely in the market. The fundamental premise is that the market, if left to its own devices, can solve almost all economic problems through sharing, synergizing, and mutual learning. However, in some ways, state intervention is also required to help markets function with optimum efficiency.
At a very basic level, a market is a place, physical or virtual, where buyers and sellers meet with the purpose to fulfil their perceived needs. It provides an interface between the two. When the parties involved agree on and execute exchange of a product or a service at a specified price, it is called a transaction. The markets affect transactions in multiple ways. Therefore, it is important to understand various characteristics of markets so that we can use them to our advantage.
Types of Markets
There are two main types of markets catering to a variety of needs. These are primary and secondary markets. What is their scope and role and how these markets function to serve the interest of buyers and sellers is elaborated in the succeeding paras:
Primary Market
The market where new products/ services are sold/ purchased or where products/ services are sold/ purchased for the first time is called a primary market. All categories of products and services are included e.g. fast moving consumer goods (FMCGs), perishables, consumer durables, machinery, computer hardware and software, real estate products, shares of businesses in the form of IPOs, mutual funds, insurance, and debt products, etc. The majority of services and some products i.e. FMCGs and perishables etc are sold in primary markets only.
Secondary Market
This is the market where products are sold subsequently i.e. for the second or third time and so on. A few examples are consumer durables like electronics, automobiles, etc, computer hardware and mobile phones, machinery and parts, etc. Stock markets less the IPO counter, ETFs (Exchange Traded Funds) and real estate markets where properties are traded after the first purchase from the developer are also examples of secondary markets.
Analysis
- Primary markets cannot fulfill all consumer needs, therefore, secondary markets are required.
- The owner of a product may want to sell it before the completion of its life cycle due to any reason and there may be a buyer who does not want to buy a new product due to his compulsions/ preferences. A secondary market caters to all such needs. It adds flexibility to the transactions and provides additional opportunities to buyers and sellers. It enables them to think about transactions in new ways.
- Primary markets are more formal and relatively easy to regulate. The sellers are in limited numbers and can be easily registered, regulated, and taxed. Secondary markets operate differently. Their registration, regulation, and taxation are comparatively difficult.
- Secondary markets operate in a rather informal way. These are normally loosely regulated or may be unregulated. The protection of consumers’ rights is difficult to ensure. Therefore, while making a purchase here, one has to be more careful.
- The pricing mechanisms of both markets differ. In the case of new products/ primary markets, prices are almost fixed or may move within a narrow band and the room for bargaining is limited. Normally, the prices are determined by the seller, especially where the brand is authentic, and the products/ services are offered at a specific price on a ‘take it or leave it’ basis. The principle of demand and supply is applicable but in an indirect manner.
- On the other hand, prices in some secondary markets may fluctuate in a wider spread. The most pertinent examples are stock markets and real estate markets. There can be many reasons for this:
- Buyers and sellers come from diverse backgrounds having different needs, sentiments, and understanding of the products.
- The principle of demand and supply directly affects price determination.
- External factors like political situation: local, regional, and international, elections, security/ law and order, financial data, and how people process/ interpret these factors affect secondary markets significantly more than primary markets. Therefore, terms like ‘market sentiment’ are more relevant to some secondary markets.
- Due to wider price swings in secondary markets, some people perceive it as an opportunity to make quick money. They buy a product with the intent to sell it in the same market, at a premium, after some time. This speculative practice further amplifies the price swings.
- In secondary markets where second-hand products are traded, this may not happen because the price of the new product in the primary market acts as a determinant of the price of the old item, on a relative basis.
- However, in the secondary markets where there is no distinction between new or old products e.g. stock markets and real estate markets (plots only), price speculation is rife.
- This implies that a genuine buyer may have to buy a product at a price higher than what it merits. On the other hand, a genuine seller may get a lower price. However, secondary markets also offer some good bargains to buyers as well as sellers. It is, therefore, advisable to have a process to determine the ‘fair value’ of what they want to buy/ sell, independent of what it is available for. This should act as a useful reference for comparison with the market price and subsequent decision-making.