Secondary Market

Secondary Market is where one buys or sell securities, commonly known as the “Stock Market”. Those transactions that take place on the secondary market are termed secondary because they are one step removed from the initial transaction that created the securities in question. The exchanges, such as the Bombay Stock Exchange (BSE), National Stock Exchange (NSE), the NASDAQ and the New York Stock Exchange (NYSE), are secondary markets. Company stocks, mutual funds and bonds are bought and sold on secondary markets by investment banks, corporations and individuals.

Securities are traded on a secondary market between investors, not with the issuer. Investors who wish to purchase Tata Steel stock will have to do so from another investor who owns such shares, not directly from the company. Therefore, the company will not be involved in the transaction.

There are two types of secondary markets – stock exchanges and over-the-counter markets. Exchanges are centralised platforms where securities are traded without any contact between buyers and sellers. Examples of such platforms include NSE and BSE. However,one will not find direct contact between the seller and the buyer of securities in this type of secondary market. Regulations are in place to ensure the safety of trading. In this case, the exchange is a guarantor, so there is almost no counterparty risk.

Functions of a secondary market are as follows:

• It is an economic barometer

• It determines the price of securities

• Liquidity

• Safety of transactions

• Ensures a better trading practice

• Offers marketability and liquidity to existing securities

• Offers scope for speculation in legal terms

• Offers opportunities for saving and investment to an investor

• They have a say in the economic growth of a country.

The important players in a secondary market are:

* Retail investors

• Financial in betweeners

• Brokerage and security dealers

The types of secondary market are:

• Over-the-Counter or OTC

• Exchanges

• Auction market

• Dealer market

The unpredictable fluctuation in the price of a security can result in quick loss or gains in a shorter time frame. An investment is possible with a small amount of money, but an investor has to pay brokerage every time they buy or sells a share.