Finance-Theory · Unit 9 · Video 2 · Interactive Practice

Two Markets for One Share: Why New Issues Rise and Fall While Trading Swings Far Less

IKey Formulas

Formula	Name	What it needs
$\text{cash to the company} = \sum_{\text{primary sales}} \text{shares} \times \text{price}$	Primary vs secondary	Only the first sale of a share raises money for its issuer: private venture capital rounds, the IPO and later seasoned equity offerings. Every resale on the secondary market pays the selling investor, not the company
$\text{spread} = P_{\text{offer}} - P_{\text{bid}}$	Bid-offer spread	Through a middleman you buy at the offer and sell at the bid; the gap between them is the middleman's compensation
$P_{\text{mid}} = \tfrac{1}{2}\left(P_{\text{bid}} + P_{\text{offer}}\right),\quad P_{\text{offer}} - P_{\text{mid}} = P_{\text{mid}} - P_{\text{bid}} = \tfrac{1}{2}\,\text{spread}$	ECN midpoint trade	On an ECN buyer and seller cut out the middleman and trade in the middle of the spread, so each saves half the spread
$\%\Delta = \dfrac{X_{\text{end}} - X_{\text{start}}}{X_{\text{start}}}$	Percentage change (our yardstick)	Puts series with different units on one scale. IPO proceeds, 2000 to 2001: $\tfrac{36 - 76}{76} \approx -52.6\%$ ; NYSE volume over the same year: $\tfrac{1240 - 1042}{1042} \approx +19.0\%$

Key Insight: The primary market raises money for companies and rises and falls with the business and credit cycles. The secondary market, where existing shares pass from investor to investor, sets the prices; its volume has grown over the long run with far smaller swings than new issues.

IIOnly the First Sale Pays the Company

With illustrative numbers: only the primary sales put cash in the company; every other sale is investor to investor.

Sale 0 / 6

IIINew Issues Swing, Trading Grows

From 1990 to 2004, IPO proceeds rose and collapsed with the cycle while NYSE volume grew almost every year.

Year 2001

💡 After 2008, the year of the crisis and of heavy trading, the pattern broke: counted across every U.S. trading venue, volume fell by roughly a third over the following years and set new records only in the 2020s, averaging 17.6 billion shares a day in 2025 and 19.3 billion over 2026 through August (SIFMA).

IVCutting Out the Middleman

With illustrative prices: trading at the midpoint splits the middleman's spread equally between buyer and seller.

Bid $20.00 Offer $20.10 Route Shares

💡 Electronic execution has since moved trading off the listed exchanges: in 2025 off-exchange venues (alternative trading systems and broker-dealers) handled 50.6% of total consolidated U.S. share volume, the first year above half, and just under half so far in 2026.

VQuiz Questions

Problem 1 · Where the Money Goes

Given: four sales of shares. Which one puts new money into the company whose shares are sold?

✅ Correct! A seasoned equity offering is a primary-market sale: the shares are newly issued, so the cash goes to the company.

❌ Not quite. This is the venture capitalist cashing out at public-market prices. The shares already exist, so the money goes to the VC partnership, not the company.

❌ Not quite. An ECN is a secondary-market venue: existing shares pass from one investor to another, and the company receives nothing.

❌ Not quite. A resale of existing shares is a secondary-market trade, whatever the price; the selling investor gets the money.

Show solution

Only the first sale of a share raises money for the company that issues it. The primary market covers private sales to venture capital partnerships, the IPO and, for a company that is already public, seasoned equity offerings of additional shares.

Options (a), (b) and (d) are all resales of shares that already exist: owner to owner on the secondary market, whether the venue is the NYSE or an ECN and whoever the seller is. Only (c) issues new shares, so only (c) puts cash in the company.

Problem 2 · Half the Spread

Given: a dealer quotes a bid of $40.00 and an offer of $40.12 (illustrative prices). A large buyer and a large seller of 5,000 shares instead meet on an ECN at the midpoint. How much does the buyer save in total compared with buying from the dealer?

✅ Correct! The buyer pays the midpoint $40.06 instead of the offer $40.12, saving $0.06 on each of 5,000 shares.

❌ Close, but… $600 is the whole spread on 5,000 shares, the dealer's full compensation. At the midpoint that saving is shared: the buyer keeps half and the seller keeps half.

❌ Not quite. You halved twice. The midpoint is half the spread below the offer, so the buyer's saving per share is $0.06, not $0.03.

❌ Not quite. That is what the buyer pays in total at the midpoint, not what the buyer saves.

Show solution

The spread is the offer minus the bid, $40.12 − $40.00 = $0.12 per share. The midpoint is

P_{\text{mid}} = \tfrac{1}{2}(40.00 + 40.12) = 40.06

so the buyer pays $40.06 instead of $40.12, a saving of $0.06 per share, half the spread. On 5,000 shares:

5{,}000 \times 0.06 = 300

The buyer saves $300. The seller also receives $40.06 instead of the $40.00 bid, and gains the other $300; the $600 that would have gone to the dealer is split between them.

Problem 3 · Two Markets, One Downturn

Given: on the lecture slide, U.S. IPO proceeds were $76 billion in 2000 and $16 billion in 2003, and NYSE average daily volume was 1,042 million and 1,398 million shares a day. Find the percentage change from 2000 to 2003 for each.

Percentage change in IPO proceeds?

Percentage change in NYSE volume?

✅ Correct! IPO proceeds fell by almost four-fifths while trading in existing shares grew by about a third: the two markets moved in opposite directions through the same downturn.

❌ Check the base. A percentage change is measured from the starting value (2000), not the ending value (2003).

❌ Not a percentage. That is the change in units (billions of dollars, or millions of shares a day). Divide it by the starting value.

❌ Almost. That is the ratio of end to start, written as a percentage change. Subtract 1 from the ratio first.

❌ Check the IPO change. Use (end − start)/start with start = 76.

❌ Check the volume change. Use (end − start)/start with start = 1,042.

Show solution

IPO proceeds (billions of dollars), start 76, end 16:

\%\Delta = \frac{16 - 76}{76} = \frac{-60}{76} \approx -0.789 = -78.9\%

NYSE volume (millions of shares a day), start 1,042, end 1,398:

\%\Delta = \frac{1398 - 1042}{1042} = \frac{356}{1042} \approx 0.342 = +34.2\%

The primary market collapsed with the cycle while the secondary market kept trading more, even though volume dipped slightly from 2002 (1,441) to 2003.

Problem 4 · Undoing a Growth Rate

Given: U.S. equity trading averaged a record 17.6 billion shares a day in 2025, up 44.6% from 2024. What 2024 average do these two figures imply?

✅ Correct! 17.6 is 144.6% of the 2024 figure, so 2024 was 17.6 / 1.446 ≈ 12.2 billion shares a day.

❌ Close, but… Taking 44.6% off 17.6 measures the change from the wrong base. The 44.6% is a percentage of the 2024 figure, so divide by 1.446 instead of multiplying by 1 − 0.446.

❌ Not quite. Multiplying by 1.446 grows 2025 by another 44.6%; to go back a year, divide.

❌ Not quite. 44.6% is a percentage, not 0.446 billion shares; it applies to the whole 2024 figure.

Show solution

Growth of 44.6% means the 2025 figure is the 2024 figure times $1.446$ :

V_{2025} = V_{2024} \times (1 + 0.446) \quad\Longrightarrow\quad V_{2024} = \frac{17.6}{1.446} \approx 12.17

The implied 2024 average is about 12.2 billion shares a day. Check: $12.17 \times 1.446 \approx 17.6$ .

The tempting shortcut $17.6 \times (1 - 0.446) \approx 9.75$ fails because a 44.6% rise and a 44.6% fall are measured from different bases.

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