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We can classify stock market transactions into three distinct types:

1. Trading in the outstanding shares of established, publicly owned companies: the secondary market. MicroDrive Inc., a company we analyze throughout the book, has 50 million shares of stock outstanding. If the owner of 100 shares sells his or her stock, the trade is said to have occurred in the secondary market. Thus, the market for outstanding shares, or used shares, is the secondary market. The company receives no new money when sales occur in this market.
2. Additional shares sold by established, publicly owned companies: the primary market. If MicroDrive decides to sell (or issue) an additional 1 million shares to raise new equity capital, this transaction is said to occur in the primary market.2
3. Initial public offerings by privately held firms: the IPO market. Several years ago, the Coors Brewing Company, which was owned by the Coors family at the time, decided to sell some stock to raise capital needed for a major expansion program.3

This type of transaction is called going public—whenever stock in a closely held corporation is offered to the public for the first time, the company is said to be going public. The market for stock that is just being offered to the public is called the initial public offering (IPO) market.

IPOs have received a lot of attention in recent years, primarily because a number of “hot” issues have realized spectacular gains—often in the first few minutes of trading. Consider the IPO of Boston Rotisserie Chicken, which has since been renamed Boston Market and acquired by McDonald’s. The company’s underwriter, Merrill Lynch, set an offering price of $20 a share. However, because of intense demand for the issue, the stock’s price rose 75 percent within the first two hours of trading. By the end of the first day, the stock price had risen by 143 percent, and the company’s end-of-the-day market value was $800 million—which was particularly startling, given that it had recently reported a $5 million loss on only $8.3 million of sales. More recently, shares of the trendy restaurant chain Planet Hollywood rose nearly 50 percent in its first day of trading, and when Netscape first hit the market, its stock’s price hit $70 a share versus an offering price of only $28 a share.4

Taken From : Five-Minute MBA – Corporate Finance

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