Primary and Secondary Markets
When it comes to financial activities, it is necessary to understand the difference between primary and secondary markets. They are distinct phenomena, and traders, investors, and other stakeholders should know how they vary. Primary and secondary markets are different according to their overall purpose, mechanics, and how they can impact the performance of a company, while the following discussion will highlight these peculiarities in detail.
Since the primary market deals with creating securities, its purpose is to allow investors and traders to buy new stocks of a company. In other words, this market emerges when a firm sells its new bonds and stocks to the public. An initial public offering (IPO) is an example of the primary market, and it can reveal the market’s mechanics. For example, a business can hire an underwriting firm to determine the details of an IPO. When the price of the stock is obtained, it is revealed to investors, and they can directly contact an issuing company to buy its securities.
Also known as the stock market, the secondary market allows investors to trade the accumulated securities among themselves. New York Stock Exchange, Nasdaq, and other exchanges are examples of this market. Its mechanics can differ depending on which category is under consideration. Thus, an auction market implies that investors congregate in a single area, announce stock prices, and make deals on mutually appropriate conditions. Simultaneously, a dealer market exists within an electronic network, where the dealers declare buying or selling prices to other market participants. Competition among the dealers results in the best stock prices for investors.
It is reasonable to add that the activity of the markets can influence the performance of a company. On the one hand, investors’ actions in the primary market facilitate the firm’s capital growth so that the business can raise sufficient funds. On the other hand, the state of affairs in the secondary market can also demonstrate that the company can raise funds by issuing more shares to meet high demand.
Return on Equity and Earnings per Share
Return on equity (ROE) and earnings per share (EPS) are essential metrics that should be used to assess the company’s performance and evaluate its value. The ROE indicates a firm’s “ability to obtain profits through all capabilities and all available sources” (Martina et al., 2019, p. 2). A high ROE demonstrates that a firm keeps increasing its profit generation and efficiently deploys shareholder capital. Since the ROE focuses on returns from the net assets, it is necessary to define and understand this metric to identify whether the firm can generate value. To calculate the ROE, one should divide the firm’s net income by its shareholder equity.
In turn, EPS assesses and represents other financial details of a company. This metric denotes “the level of net profit for each share that the firm is able to achieve when running its operations” (Martina et al., 2019, p. 2). The EPS is essential because it reveals how beneficial a business is because it reflects the profitability of its individual shares, which allows for evaluating the firm’s value. One should subtract the preferred stock from the company’s net income and divide the result by the number of shares outstanding to calculate the EPS.
I have recently calculated the ROE and EPS for Apple as per the 2020 data. Thus, the ROE was 51% because the net income was $33,485 million, while the shareholder equity was $65,339 million. Simultaneously, the EPS was $1.91 because there was no preferred stock in the company, while there were 17,550,281 shares outstanding. The high ROE denoted that the company efficiently utilized its resources and generated value. Simultaneously, the EPS demonstrated that an individual investor earned $1.91 per share, which was a positive indicator.
Reference
Martina, S., Sadalia, I., & Bukit, R. (2019). The effect of quick ratio, debt to equity ratio, earning per share, price to book value and return on equity on stock return with money supply as moderated variables (study of banking companies listed on Indonesia Stock Exchange period 2008-2017). International Journal of Public Budgeting, Accounting and Finance, 2(3), 1-10.