Explain the difference between primary and secondary markets.

The distinction between primary and secondary markets is fundamental in understanding how securities are brought to market and traded. Primary markets are where new securities are created and issued for the first time. This is the platform where companies or governments can raise fresh capital by offering shares or bonds to investors. Essentially, it involves the initial sale of stocks or bonds directly from the issuer to the investors.

In contrast, secondary markets allow investors to trade existing securities that have already been issued. In this setting, the original issuer is not involved in the transactions; instead, trading occurs between investors. This marketplace provides liquidity and the opportunity for investors to buy and sell their holdings.

The other choices misrepresent the roles of these markets. For instance, trading existing securities is a key function of the secondary market, not the primary market, which solely focuses on the creation and sale of new securities. Also, the suggestion that primary markets are limited to real estate or government bonds is incorrect, as they encompass a wide range of financial instruments, including corporate stocks and bonds.