WHAT RISKS ARE ASSOCIATED WITH PRIMARY AND SECONDARY MARKETS?
The risks presented by a security change as it passes from the primary market to the secondary market. Because initial issues of securities are priced by their issuers, it can be difficult to judge whether a security is a bargain at its issuing price, or not. Even with a relatively safe investment, such as a government bond, it is possible that interest rates may change, reducing the value of the bond’s returns or increasing the chance that it will be repaid before maturity. With new stock issues, the opening price is largely a highly educated guess. If investors do not see the company’s potential as the underwriters do, the hoped-for leap in price may never occur. Beyond that is the question of whether the fledgling public company will live up to its potential for growth and profitability. On the other hand, if the company does grow and prosper, its stock may never again be as inexpensive as on its opening day. This is why aggressive growth investors especially prize a promising IPO.
