What distinguishes the primary market from the secondary market?

The primary market is characterized by the issuance of new securities, which is a critical aspect of how companies and governments raise capital. In this market, investors purchase securities directly from the issuer, such as when a company goes public through an initial public offering (IPO) or when a government issues bonds to fund its projects. This process allows new financial instruments to enter the market.

In contrast to this, the secondary market involves the trading of existing securities, meaning these are securities that have already been issued and are being sold among investors rather than bought directly from the issuing entity. This distinction is fundamental to understanding how financial markets operate as it highlights the role of the primary market in capital formation and the secondary market's role in providing liquidity to investors.

Other options, such as the notion that the primary market only deals with stocks or includes all financial transactions, do not accurately capture the essence of the primary market's function in the economy. The primary market is not limited to stocks; it also includes bonds and other forms of securities. Moreover, the assertion that it includes all financial transactions is inaccurate since it specifically pertains to newly issued securities.