What Is a Secondary Market?
The secondary market is where investors buy and sell securities they already own. It is what most people typically think of as the “stock market,” though stocks are also sold on the primary market when they are first issued. The national exchanges, such as the New York Stock Exchange (NYSE) and the NASDAQ, are secondary markets.
Secondary Market
Understanding Secondary Market
Though stocks are one of the most commonly traded securities, there are also other types of secondary markets. For example, investment banks and corporate and individual investors buy and sell mutual funds and bonds on secondary markets. Transactions that occur on the secondary market are termed secondary simply because they are one step removed from the transaction that originally created the securities in question. For example, a financial institution writes a mortgage for a consumer, creating the mortgage security. The bank can then sell it to Fannie Mae on the secondary market in a secondary transaction.
Primary vs. Secondary Markets
It is important to understand the distinction between the secondary market and the primary market. When a company issues stock or bonds for the first time and sells those securities directly to investors, that transaction occurs on the primary market. Some of the most common and well-publicized primary market transactions are IPOs, or initial public offerings. During an IPO, a primary market transaction occurs between the purchasing investor and the investment bank underwriting the IPO. Any proceeds from the sale of shares of stock on the primary market go to the company that issued the stock, after accounting for the bank’s administrative fees.
If these initial investors later decide to sell their stake in the company, they can do so on the secondary market. Any transactions on the secondary market occur between investors, and the proceeds of each sale go to the selling investor, not to the company that issued the stock or to the underwriting bank.
Secondary Market Pricing
Primary market prices are often set beforehand, while prices in the secondary market are determined by the basic forces of supply and demand. If the majority of investors believe a stock will increase in value and rush to buy it, the stock’s price will typically rise. If a company loses favor with investors or fails to post sufficient earnings, its stock price declines as demand for that security dwindles.
Multiple Markets
The number of secondary markets that exist is always increasing as new financial products become available. In the case of assets such as mortgages, several secondary markets may exist. Bundles of mortgages are often repackaged into securities such as GNMA pools and resold to investors.
Best place to invest in
Nowadays, there are many investment options available in India. Unlike a few years ago, when FDs and equities were the popular choices among people, various new-age investment options like P2P lending have emerged. The best part about these investments is that they have the ability to balance the risk and returns, which most investors find hard to achieve.
On top of that, online marketplaces like LenDenClub further simplify the process for investors. Let us see how –
- A family of more than 2 million people
- AI-powered Auto investment
- Allows diversification and reduces risk
- Screens borrower’s profile through 200+ data points to reduce the risk of default.
- Provides return of up to 10 to 12% p.a.*
- Market-risk free returns
- Safe and Secure transactions using the ESCROW mechanism.
Hop on the bandwagon with 2 million+ investors. Register now!
*P2P investment is subject to risks. And investment decisions taken by a lender on the basis of this information are at the discretion of the lender, and LenDenClub does not guarantee that the loan amount will be recovered from the borrower.