The financial market is a vast space to explore. And we’re not kidding when we say there are thousands of different markets out there. But the financial markets mostly work with the primary and the secondary market.
And while the name suggests it’s just a kind of a backup to the primary market, it’s not. It’s where tons of transactions happen every day.
Let’s see what we can learn about this market here. Read on!
What is the Secondary Market?
The secondary market is the market where you as an investor can buy or sell securities that you already own.
For context, it’s what most people usually call the stock market. But keep in mind that when they first go public, companies also issue stocks on the primary market).
The New York Stock Exchange and the NASDAQ are both secondary markets. That’s because investors can use these exchanges to buy or sell the stocks that they already have.
Stocks aren’t the only assets you can trade on the secondary markets. You can also buy mutual funds and bonds on this market.
So, why do we call it the with such a name though? Transactions that happen in this market have the term “secondary” because the market is the second step from the transaction that created the securities.
Primary Markets and Secondary Markets: Comparison
As an investor, you have to understand the difference between the secondary and the primary.
Take stocks for instance. When a company issues stocks or bonds for the first time to investors, the transaction happens in the primary market.
Initial public offerings are just one of the more popular transactions happening in the primary market.
During this transaction, the investor buys shares from the company with the help of an investment bank underwriting the IPO.
All the proceeds go to the company, except those that they need to pay the underwriting bank. After this, investors with the stock can start buying or selling their stake in the company.
And they do that through the secondary market. The proceeds go to the selling investor and not the company or the investment bank.
The investment bank or the company set the price in a primary market. Meanwhile, the price comes about from the forces of supply and demand in the secondary counterpart.
If more investors think that the stock will go up in value and buy it, the stock’s price will increase.
If, for a variety of issues, the investors think the company sucks or will suck, the stock price usually goes down. That’s a result of lower demand for the stock.
For a small investor, it’s better to trade securities on the secondary market. That’s because anyone can buy securities in this market as you as he/she can pay for it.
Your broker usually buys the stock on your behalf. Of course, you often need to pay a commission for their services.
Secondary markets can be auction or dealer-type markets. The auction market is where you see buyers and sellers congregate and announce prices. The dealer market deals with the internet and electronic networks.