Secondary Market: Example, Types and Meaning

Secondary Market Example

The secondary market, an alternative term for after-market where previously owned assets such as financial bonds, notes, shares or options can be bought or sold by investors in the financial marketplace. Usually, these bonds are created by initial investors who issue shares of such securities, unlike the capital or primary market where the buyer does the transaction with principal publisher. With a simple example it can be understood, as if you want to buy a future from any company, you become the primary investor. When you sell it to another person, you it is known as Secondary transaction.  In India, all stock exchanges, including the bond markets, the National Stock Exchange (NSE), the Bombay Stock Exchange (BSE), and are  fallen under secondary markets while the commonly known international secondary market includes the New York Stock Exchange (NYSE), LSE (London Stock Exchange) & NASDAQ.

How does it work?

Through a chain of traders, the Secondary Market offer high liquidity making fair exchange valuation of a financial asset. The secondary market influences the price of assets toward their true worth through a vast network of separate but related exchanges. In the secondary market, a broker buys the product at a fixed predetermined price before an IPO (Initial Public Offering) takes place. A fee for executing the deal will also be due from investors to the broker. Now, the issuing firm is no longer a party to any transaction between investors, save for corporate stock buybacks, as the initial offering has been completed. Efficiency in the economy is encouraged by the secondary market. A buyer and a seller are involved in every transaction of a security, with the buyer placing a higher value on the security than the seller does.

In Secondary Market, the deal can be done by Auction market where the prices at which buyers and sellers are willing to purchase and sell their stocks and other financial assets can be announced & Deal Market where mainly small investors transact through electronic networks.

It serves as a gauge for the economy of the country and the amount of savings that are invested in securities.

How is it different from Primary Market?

There are many differences between Primary & Secondary Markets. They are:-

Investment bankers may be used by companies that issue securities on the primary capital market to get assurances from significant institutional buyers to buy the securities at the initial offering. In contrast, the secondary market, often known as the stock market, is where shares are exchanged after the firm has sold its offering on the main market.

Any area of the financial system that raises money through bonds, shares, and other assets is referred to as a capital market. In the primary capital market, new stocks and bonds are generated and sold to investors, whereas investors exchange securities in the secondary capital market.

Small investors frequently cannot acquire securities at this time because the firm and its investment bankers must concentrate on marketing the sale to major investors who can buy a large number of securities at once, whereas anybody can purchase securities on the secondary market as long as they are committed to pay the asking price per share.

While investors in the secondary market abide by the regulations set forth by the stock exchanges and the government, the corporations issuing shares and debentures are required to comply with all regulations.

The goods in a primary market are constrained, consisting of IPOs and FPOs, and they don’t change since they are fixed, in contrast to the secondary market, where prices fluctuate significantly due to supply and demand.

The frequency of transaction in primary market is very limits as they investor can only invest once whereas the frequency of transaction in secondary market is very high as the investors can liberally transact anytime they want.

Primary and secondary markets are crucial for generating revenue and providing finance for businesses therefore, both of these markets provide funding for businesses, investors, and the government, but with the potential for profit also comes the potential for danger. Thus it is advisable to invest only after learning about the market’s benefits and drawbacks.