Secondary Market

Published: April 28, 2016

What Does Secondary Market Mean?

Secondary market is the market where previously issued securities, such as stocks and bonds, are traded among investors. It is also the market where investors buy securities from other investors, and not from the issuing organization. The sale proceeds from the secondary market go to the investor, and not the issuing company. A primary market, on the other hand, is the place where the securities are given by the issuing organization for the first time and the proceeds go towards the capital of that organization.


Divestopedia Explains Secondary Market

Secondary markets include all stock exchanges where investors buy or sell their securities with other investors. Because investors who deal with securities needed a place to exchange their offerings for money, the stock exchange emerged. Today, it is highly sophisticated and uses advanced technologies to provide real-time prices of any share.

Secondary markets provide the liquidity for investors and even for the economy as a whole. In general, the higher the number of investors, the greater the liquidity for that market. It is also in tune with the investors’ preference for liquidity because most investors would not prefer to lock up their funds for long periods of time and the secondary market gives them the platform to have liquidity when they want it.

Besides the widely accepted definition of secondary markets, there also exists private secondary markets that deal with the buying and selling of investor commitments to private equity funds. In this market, the sellers not only sell their investments, but also the unfunded commitments, so that buyers have the choice to take any stake in private equity companies.

Both these types of secondary markets are heavily regulated by the national government of every country because they are an important source of capital formation and liquidity for companies, investors and the economy as a whole. Also, from a company’s perspective, these secondary markets are an important way to monitor and control the public perceptions of the company. It helps with crucial management decisions such as incentive-based management contracts and aggregation of information through share prices.


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