A capital market is a planned market, which is further classified into primary and secondary markets, each serving its specific purposes.
The Secondary market is the platform used for trading securities already issued by the primary market, and it allows all scales of investors to buy and trade securities.
Though the secondary market facilitates the trading of both equity and debt, it is mainly used for equity.
The equity or stock market has a substantial presence in the secondary market. It is the intelligent investor’s secret for quick and significant returns.
But, to fare well in the equity market, one first needs to master the secondary market meaning.
So, without any further ado, let us take you through the fundamentals of the secondary market, starting with the secondary market definition.
A secondary market is a platform that facilitates the trading of shares of multiple companies amongst investors. Secondary markets consist of both equity as well as debt markets.
It means that the investors can freely buy and sell the shares without the company’s intervention that issues them.
The value of a share is based on the performance of the company. Income in this market is generated via the sale of the shares from one trader to another. Though stocks are the most commonly traded securities, there are many other types of secondary markets.
For instance, investment banks, corporate companies, and individual investors buy and sell mutual funds and bonds on the secondary markets.
Secondary market transactions are termed secondary just because one step is removed from the trade that created the securities in question.
For instance, a financial institution that writes a mortgage for a customer creates mortgage security. The bank then sells it to Fannie Mae in the secondary market in a secondary transaction.
The various entities that are functional in the secondary market include –
The Different Instruments in the Secondary Market are as follows:
The instruments traded in a secondary market consist of the fixed income instruments, the variable income instruments, and the hybrid instruments.
Fixed income instruments are debt instruments that ensure a standard form of payment, such as interests, and the principal is paid back on maturity. Debentures, bonds, and preference shares are examples of fixed-income securities.
Debentures are financial instruments that are primarily categorised as debt instruments.
Any type of collateral does not secure these securities. Therefore, returns generated from debentures are dependent on the issuer’s credibility.
As for the bonds, they are effectively a contract between two parties, whereby the government or the company issues these financial instruments. As investors buy the bonds, it lets the issuing entity secure many funds. Investors get interests at fixed intervals, and the principal is paid back on maturity.
Individuals who own a company’s preference shares receive the dividends before the payments are made to the equity shareholders.
If a company faces bankruptcy, preference shareholders are paid before the other shareholders.
Investment in the variable income instruments brings about an effective rate of return to the investors. The various market factors help determine the quantum of such returns. These securities expose the investors to higher risks and higher rewards simultaneously. Examples of such variable income instruments are – derivatives and equity.
Equity shares are those instruments that allow a company to raise finances. Also, investors holding equity shares have a specific claim over the net profits of a company and the assets if the company is liquidated.
As far as derivatives are concerned, they refer to a contractual obligation between the two parties involved in paying off the stipulated performance.
Two or more financial instruments are joined to form a hybrid instrument in these instruments. Convertible debentures are an example of hybrid instruments.
Convertible debentures are available as a loan or as debt securities. These debentures have
the option of being converted into equity shares.
The functions of the secondary market are as follows:
The stock exchange provides a platform for the investors to enter into trading transactions of bonds, shares, debentures, and other such financial instruments in the form of secondary markets.
Transactions can take place at any time. The market provides for active trading so that immediate purchase or selling with slight variation in price among different transactions can occur. Also, there is a continuity in trading, which enhances the liquidity of the traded assets in the market.
Investors finds good platforms, such as an organised exchange, to liquidate their holdings. The securities that are held can be sold in various exchanges.
A secondary market also acts as a medium for determining the pricing of multiple assets in a transaction that is consistent with the demand and supply. The information about these transactions’ prices is provided within the public domain and enables the investors to decide accordingly.
It is also indicative that a nation’s economy serves as a link between savings and investment, which implies that the savings are mobilised via investments through securities.
Secondary markets are generally of two types – Stock exchanges and over-the-counter markets.
Stock exchanges are centralised platforms where securities trading takes place by direct contact between the buyer and the seller. The National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) are two examples of such platforms.
Transactions in the stock exchanges are subject to stringent regulations in securities trading.
A stock exchange is a guarantor itself, and the counterparty risk is negligible. It can obtain such a safety net via a higher transaction cost levied on investments in the form of commissions and exchange fees.
Over-the-counter markets, unlike stock exchanges, are decentralised, comprising participants that engage in trading amongst themselves.
Over the counter, markets are subject to higher counterparty risk since parties deal directly with each other, and there is no regulatory oversight.
Foreign exchange markets (FOREX) serve as an example of an over-the-counter market. There is tremendous competition in an Over The Counter market to acquire higher volume.
Due to this, the securities’ price differs from one seller to another.
Apart from the stock exchange and the Over The Counter market, other secondary markets include the auction and dealer markets.
The former serves as a platform for buyers and sellers to negotiate and then arrive at an understanding of the rate for trading securities. This information is related to the pricing and is put out in the public domains, including the offer’s bidding price.
The dealer market is another secondary market where various dealers decide the prices of specific securities regarding a transaction. Foreign exchange and bonds are typically traded in a dealer market.
All types of investors benefit from secondary market transactions because they supply liquidity, and their costs significantly decrease due to the enormous volume of transactions.
The following are a few secondary market examples of securities trades.
A key difference in the primary market is that a primary market is only concerned with the transactions where the issuing company issues a public offering to the investors for the first time. Further selling of those same shares takes place in the secondary market.
To get a detailed understanding of how the primary market differs from the secondary market.
Let us provide a detailed comparison chart comparing the primary and secondary markets.
S.no. | Basis | Secondary Market | Primary Market |
1 | Definition | The secondary market is where the securities are traded among the investors. A share comes to the secondary market after being issued in the primary market. | The primary market is where the securities are traded directly from the issuing company to the investors, and it is the place where securities are sold to first-time investors. |
2 | Synonymous names | The secondary market is also known as the aftermarket. | The primary market is also known as the new issues market. |
3 | Parties involved in the trade. | The buying and selling of securities happen among the investors only. | The buying and selling of securities happen between the investors and issuing companies. |
4 | Fund providing | The secondary market does not allow companies to raise funds for their ventures. | The primary market allows a company to raise capital for its business ventures, and it aids in finance for a company’s expansion and growth. |
5 | Intermediary | Brokers are the intermediates in a secondary market. | Underwriters are the intermediates in a primary market. |
6 | Fluctuation in price. | The secondary market prices depend on demand and supply, and hence, there are tremendous fluctuations in the costs of the secondary market. | The primary market has fixed prices. Hence, there are no fluctuations in the primary market. |
7 | Variety of instruments | The secondary market has a plethora of options. There are various products for an investor in the secondary market.
Some of these products are shares, debentures, derivatives and warrants. However, that is not all. The secondary market is a potpourri of financial instruments. |
The primary market does not entertain variety in its securities. The market has limited options: initial public offerings (IPO) and follow-on public offerings (FPO). |
8 | Purchase. | The investors do not get involved with the issuing company in the secondary market while purchasing securities. | In a primary market, the investors purchase securities directly from the issuing company. |
9 | Transactional frequency | The secondary market has no limit to selling and purchasing security, and investors can do it as many times as they want. | In a primary market, the investor can invest only once in a market for a particular security, and the sale and purchase are limited to the primary market. |
10 | Beneficiary | The investor is the beneficiary in the secondary market. | The company is the beneficiary in a primary market. |
11 | Structure | The secondary market has a well-formed structure and an organised set-up. | The primary market does not have a structure, so it is not organised. |
12 | Regulations | The secondary market has guidelines provided for the investors. Investors need to follow the guidelines given by the stock exchange and the government. | If a company decides to issue shares in the primary market, it needs to follow all the guidelines provided by India’s Security and Exchange Board. |
13 | Interference | A secondary market does not experience any government interference. | A primary market experiences government interference during the issue of shares by a company. |
14 | Advantage | A secondary market is beneficial for booking profits for an investor. | A Primary market is beneficial for fundraising for a corporation or government. |
15 | Disadvantages | A substantial disadvantage of the secondary market is the losses incurred by the investors due to fluctuating prices. | A substantial disadvantage of the primary market is its time-consuming and expensive methodology. |
Following are some of the advantages of a secondary market:
Now, let us look at the flip side of the secondary market. Some of the disadvantages of secondary markets are as follows:
Here is a step-by-step guide to let you in on some insights about how to trade in the secondary market. The steps explaining how to deal with secondary market trading are as follows:
To invest in the stock market, one must firstly open a Demat or a brokerage account. One cannot trade in the stock market without opening a Demat account. The Demat account works similar to a bank account, meaning that it holds funds for trading. Furthermore, the purchased securities are stored in an electronic Demat account.
The stock price fluctuates in response to the news, the fundamentals, and the technical analysis, amongst other factors. You can work on your understanding of stocks and the markets by studying these topics, and they will assist you in understanding the best price at which you should enter or quit a trade.
A bid price is the highest amount an individual is willing to buy a stock, and the asking price is the exact opposite of the bid price. A number represents the minimum price at which the seller will sell the shares. It is critical to pick the correct bid and ask prices in order to achieve a profitable trade.
In order to plan your trade, you must study the various primary and technical evaluations of the stock. Fundamental analysis is a technique to determine the intrinsic value of a security, and it considers many factors, such as the company’s earnings, assets, and obligations. On the flip side, technical analysis analyses a stock based on the historical price and the volume chart to forecast the future potential of the stock.
The stock market is known for its volatility. As a result, a newcomer must understand how not to lose a lot of money. To limit their losses, one must set a stop-loss price while completing a trade. If a stop loss is not in place, they risk losing money.
The stock market is highly volatile and unpredictable, and nobody can precisely tell you the stock price. However, getting assistance from a professional might help beginners make better trading decisions, and they assist you in making the best possible decision.
A large amount of capital loss upfront may lead to a loss of confidence. Starting with the less volatile stocks is a great idea. It is reasonably possible that you will not make significant profits initially. However, on the upside, you can maintain good performance even when the going gets difficult.
Investing can be challenging, taking into account the stock market’s volatility. However, opening a Demat account is the first step that one can take toward trading success.
Next, one needs to work on acquiring a thorough understanding of the market, and in the long run, this will generate significant profits.
The most common capital assets related to secondary markets are stocks and bonds. It doesn’t take long, though, to develop a variety of secondary markets.
There is a secondary market for used cars. Consignment shops and clothes retailers like Goodwill are examples of secondary marketplaces for clothing and accessories. Ticket scalpers offer secondary market deals, and eBay (EBAY) is a vast secondary market for many types of items. After banks package mortgages into securities and sell them to investors, they are sold on the secondary market.
In a market economy, the value of an asset changes with time, resulting in secondary markets. These movements are influenced by various reasons, including technology, human tastes, depreciation and upgrades, and a host of others.
Traders in the secondary market are almost, by definition, cost-effective. Every non-coercive transaction of a good involves a seller who values the item less than the price and a buyer who appreciates the item more than the price. Both parties benefit from the transaction. When buyers and sellers compete, ask and bid prices collide at the purchasers who place the highest value on the things according to demand.
Economic efficiency refers to the allocation of resources to the highest valuable aim. In the past, secondary markets have decreased transaction costs, increased trading, and encouraged improved market information.
Ambitious and risk-taking investors looking for opportunities that will help them achieve significant growth should have secondary market investments as their go-to option.
Secondary markets are the barometers to assess the performance of an economy. The demand and supply mechanism provides limitless opportunities.
So, open a Demat account and swiiiiiiissshhhhhhhh your way into stock market investing.
The secondary market is a vital part of the economy.
Through the natural workings of supply and demand, the secondary market directs the price of an item toward its actual value through an extensive sequence of separate yet interconnected deals.
It is also a barometer of a country's economic health. The growth or reduction in prices indicates whether the economy is expanding or contracting.
Prices in the primary market are frequently set in advance, whereas supply and demand fundamentals decide prices in the secondary market.
When many investors feel a stock's value will climb and rush to buy it, the stock's price will usually rise. When a corporation loses popularity with investors or fails to produce adequate earnings, its stock price falls as demand for that investment falls.
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