Benefits and Limitations of Secondary Market

Secondary market is also called as after market. Stock exchange is the secondary market. The stock exchange is the medium through which the exchange of shares, Equities takes place between the seller and the buyer. Secondary market is the place where most of the trading takes place. The trading of shares and capital in secondary market takes place between the buyer and the seller, company is not involved in transactions. The price of share is decided by demand and supply of the shares and price keeps on fluctuating. In secondary market no new stocks are issued, only trading of stocks is there.

Benefits

Secondary markets are have benefits because they provide liquidity to investors. Buying and selling securities quickly often reduces the amount of value lost on a trade. These markets also allow smaller investors to get involved with trading securities. Many investors don’t initially have access to initial public offerings (IPOs), so secondary markets provide resources for smaller investors. Here’s a list of other ways that illustrate the importance of secondary markets:

• They provide adequate resources for a company’s fair valuation.
• They help indicate the economic health of a country by revealing booms and recessions.
• They drive security prices toward their genuine market value through supply and demand.

Limitations of Secondary Market

• Buying and selling in a secondary market can be time consuming. Investors have to deal with the tedious paperwork involved before completing final transactions.
• The prices of securities in a secondary market are subject to high volatility. Price fluctuations may lead to sudden or unpredictable losses for investors.
• Investors must be careful with their brokerage commissions because they are taxed every time the trade is made. Commissions can have a huge impact on investors and may even dent your profit margin if you’re not paying attention.
• Multiple external factors influence the investments in a secondary capital market thereby subjecting them to high risk. These may lead investors’ existing valuations to change rapidly within seconds.