Several years back, I was a Real Estate Broker in California. I helped people buy and sell high-end homes. Many times the homes were brand new and were sold by the builder. Other times the homes were sold by a private party. In this example, the new homes sold by the builder could be considered as being sold in the Primary Market. The money generated from the sale went to the builder of the homes (company issuing the security). If/when the homes were sold again, the sale could be considered as taking place on the Secondary Market because the funds were exchanged between the seller and the buyer (individuals making a transaction in the secondary market).
Another difference between the two markets is how prices are determined. In this example, the home builder set the asking price and little or no negotiation took place. However, when the home was later resold and “put on the market” the home price was determined by supply and demand. The final sales price was based off of comparable sales and what the buyer was willing to pay for it.
This example can also be used to discuss efficiency of the different markets. In this example, the Primary Market was efficient at selling the homes and generating income for the builders. The price of the home was more subjective than supply and demand, and based off of the building costs, profits etc. In the Secondary Market the price was determined by supply and demand and the sale price was not necessarily tied to the construction costs, but based off of what a buyer was willing to pay for it.
It takes months to complete a Real Estate Transaction.
Class, do you think a market’s efficiency is affected by the number of transactions that take place, the amount of time it takes to complete the transaction and the number of buyers and sellers present? How do these questions relate to the Primary and Secondary capital markets?