Secondary Equity 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.

Features of Secondary Market

• Gives liquidity to all investors. Any seller in need of cash can easily sell the security due to the presence of a large number of buyers.
• Very little time lag between any new news or information on the company and the stock price reflecting that news. The secondary market quickly adjusts the price to any new development in the security.
• Lower transaction costs due to the high volume of transactions.
• Demand and supply economics in the market assist in price discovery.
• An alternative to saving.
• Secondary markets face heavy regulations from the government as they are a vital source of capital formation and liquidity for the companies and the investors. High regulations ensure the safety of the investor’s money.

Major Instruments and Players in Secondary Market

The secondary market deals with fixed income, variable income, and hybrid instruments.

Fixed income instruments are usually debt securities like bonds, debentures. It also includes Preference shares.

Variable income instruments are equity and derivatives.

Hybrid instruments are preference shares and convertible debentures.

Major players in the market are Brokerage and Advisory services (commission broker, security dealers and more); Financial Intermediaries (Banks, Insurance companies, Mutual Fund, Non-Banking Financial companies); and retail investors.

Types of Secondary Markets

There are two types of secondary markets:

Exchanges

It is a marketplace, wherein there is no direct contact between the buyer and the seller, like NYSE or NASDAQ. There is no counterparty risk as an exchange is a guarantor. Also, heavy regulations make it a safe place for investors to trade securities. However, investors face a comparatively higher transaction cost due to exchange fees and commission.

Over-The-Counter (OTC) Markets

It is a decentralized place, where the market is made up of members trading among themselves. Foreign exchange market (FOREX) is one such type of market. There is more competition among the participants to get higher volume, so prices of security may vary from seller to seller. Also, OTC markets suffer from counterparty risk as parties deal with each other directly.

Pricing in Secondary Markets

In the primary market, the price of a security is set beforehand. However, in the secondary market, the price of a security is determined by its supply and demand. For instance, if most of the investors believe that the stock would gain going ahead, the demand for that stock goes up, and hence, its price. Similarly, if investors feel the stock will lose value, they will want to sell it, resulting in a price drop.

Importance of Secondary Markets

• It is a good indicator of a country’s economic condition. A rise or drop in the stock market suggests a boom or recession in an economy.
• It helps in valuing a company as economic forces of supply and demand determine the prices.
• Ensures liquidity for the investors as one can easily buy or sell the securities.
• It gives investors a chance to use their idle money to earn some returns.
• It helps the company to monitor and control public perceptions.

Functions of Secondary Market

• A stock exchange provides a platform to investors to enter into a trading transaction of bonds, shares, debentures and such other financial instruments.
• Transactions can be entered into at any time, and the market allows for active trading so that there can be immediate purchase or selling with little variation in price among different transactions. Also, there is continuity in trading, which increases the liquidity of assets that are traded in this market.
• Investors find a proper platform, such as an organized exchange to liquidate the holdings. The securities that they hold can be sold in various stock exchanges.
• A secondary market acts as a medium of determining the pricing of assets in a transaction consistent with the demand and supply. The information about transactions price is within the public domain that enables investors to decide accordingly.
• It is indicative of a nation’s economy as well, and also serves as a link between savings and investment. As in, savings are mobilized via investments by way of securities.

Significance of Secondary Markets

• It is a good indicator of a country’s economic condition. A rise or drop in the stock market suggests a boom or recession in an economy.
• It helps in valuing a company as economic forces of supply and demand determine the prices.
• Ensures liquidity for the investors as one can easily buy or sell the securities.
• It gives investors a chance to use their idle money to earn some returns.
• It helps the company to monitor and control public perceptions.

Advantages of Secondary Market

• Investors can ease their liquidity problems in a secondary market conveniently. Like, an investor in need of liquid cash can sell the shares held quite easily as a large number of buyers are present in the secondary market.
• The secondary market indicates a benchmark for fair valuation of a particular company.
• Price adjustments of securities in a secondary market takes place within a short span in tune with the availability of new information about the company.
• Investor’s funds remain relatively safe due to heavy regulations governing a secondary stock market. The regulations are stringent as the market is a source of liquidity and capital formation for both investors and companies.
• Mobilization of savings becomes easier as investors’ money is held in the form of securities.

Disadvantages of Secondary Market

• Prices of securities in a secondary market are subject to high volatility, and such price fluctuation may lead to sudden and unpredictable loss to investors.
• Before buying or selling in a secondary market, investors have to duly complete the procedures involved, which are usually a time-consuming process.
• Investors’ profit margin may experience a dent due to brokerage commissions levied on each transaction of buying or selling of securities.

Investments in a secondary capital market are subject to high risk due to the influence of multiple external factors, and the existing valuation may alter within a span of a few minutes.