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What Is The Secondary Market?
What is the Secondary Market?
A secondary market may be a platform wherein the shares of companies are traded among investors. It means investors can freely buy and sell shares without the intervention of the issuing company.
In these transactions among investors, the issuing company doesn't participate in income generation, and share valuation is quite supported its performance within the market.
Income during this market is thus generated via the sale of the shares from one investor to a different .
Some of the entities that are functional during a secondary market include –
Advisory service providers and brokers comprising commission brokers and security dealers, among others.
Financial intermediaries including non-banking financial companies, insurance companies, banks and mutual funds.
Different Instruments within the Secondary Market
The instruments traded during a secondary market contains fixed income instruments, variable income instruments, and hybrid instruments.
Fixed income instruments
Fixed income instruments are primarily ...
... debt instruments ensuring a daily sort of payment like interests, and therefore the principal is repaid on maturity. samples of fixed income securities are – debentures, bonds, and preferred stock .
Debentures are unsecured debt instruments, i.e., not secured by collateral. Returns generated from debentures are thus hooked in to the issuer’s credibility.
As for bonds, they're essentially a contract between two parties, whereby a government or company issues these financial instruments. As investors buy these bonds, it allows the issuing entity to secure an outsized amount of funds this manner . Investors are paid interests at fixed intervals, and therefore the principal is repaid on maturity.
Individuals owning preferred stock during a company receive dividends before payment to equity shareholders. If a corporation faces bankruptcy, preference shareholders have the proper to be paid before other shareholders.
Variable income instruments
Investment in variable income instruments generates an efficient rate of return to the investor, and various market factors determine the quantum of such return. These securities expose investors to higher risks also as higher rewards. samples of variable income instruments are – equity and derivatives.
Equity shares are instruments that allow a corporation to boost finance. Also, investors holding equity shares have a claim over net profits of a corporation along side its assets if it goes into liquidation.
As for derivatives, they're a contractual obligation between two different parties involving pay-off for stipulated performance.
Two or more different financial instruments are combined to make hybrid instruments. Convertible debentures function an example of hybrid instruments.
Convertible debentures are available as a loan or debt securities which can be converted into equity shares after a predetermined period.
Functions of Secondary Market
A stock market provides a platform to investors to enter into a trading transaction of bonds, shares, debentures and such other financial instruments.
Transactions are often entered into at any time, and therefore the market allows for active trading in order that there are often immediate purchase or selling with little variation in price among different transactions. Also, there's continuity in trading, which increases the liquidity of assets that are traded during this market.
Investors find a correct platform, like an organised exchange to liquidate the holdings. The securities that they hold are often sold in various stock exchanges.
A secondary market acts as a medium of determining the pricing of assets during a transaction according to the demand and provide . the knowledge about transactions price is within the general public domain that permits investors to make a decision accordingly.
It is indicative of a nation’s economy also , and also is a link between savings and investment. As in, savings are mobilised via investments by way of securities.
Types of Secondary Market
Secondary markets are primarily of two types – Stock exchanges and over-the-counter markets.
Stock exchanges are centralised platforms where securities trading happen , sans any contact between the customer and therefore the seller. National stock market (NSE) and Bombay stock market (BSE) are samples of such platforms.
Transactions available exchanges are subjected to stringent regulations in securities trading. A stock market itself acts as a guarantor, and therefore the counterparty risk is nearly non-existent. Such a security net is obtained via a better transaction cost being levied on investments within the sort of commission and exchange fees.
Over-the-counter (OTC) market
Over-the-counter markets are decentralised, comprising participants engaging in trading among themselves. OTC markets retain higher counterparty risks within the absence of regulatory oversight, with the parties directly handling one another . exchange market (FOREX) is an example of an OTC market .
In an over-the-counter market , there exists tremendous competition in acquiring higher volume. thanks to this factor, the securities’ price differs from one seller to a different .
Apart from the stock market and over-the-counter market , other sorts of secondary market include auction market and dealer market.
The former is actually a platform for buyers and sellers to reach an understanding of the speed at which the securities are to be traded. the knowledge associated with pricing is put call at the general public domain, including the bidding price of the offer.
Dealer market is another sort of secondary market during which various dealers indicate prices of specific securities for a transaction. exchange trade and bonds are traded primarily during a dealer market.
Examples of Secondary Market Transactions
Secondary market transactions provide liquidity to all or any sorts of investors. thanks to high volume transactions, their costs are substantially reduced. Few secondary market examples associated with transactions of securities are as follows.
In a secondary market, investors enter into a transaction of securities with other investors, and not the issuer. If an investor wants to shop for Larsen & Toubro stocks, it'll need to be purchased from another investor who owns such shares and not from L&T directly. the corporate will thus not be involved within the transaction.
Individual and company investors, along side investment banks, engage within the buying and selling of bonds and mutual funds during a secondary market.
Advantages of Secondary Market
Investors can ease their liquidity problems during a secondary market conveniently. Like, an investor in need of liquid cash can sell the shares held quite easily as an outsized number of buyers are present within the secondary market.
The secondary market indicates a benchmark for fair valuation of a specific company.
Price adjustments of securities during a secondary market takes place within a brief span in tune with the supply of latest information about the corporate .
Investor’s funds remain relatively safe thanks to heavy regulations governing a secondary stock exchange . The regulations are stringent because the market may be a source of liquidity and capital formation for both investors and corporations .
Mobilisation of savings becomes easier as investors’ money is held within the sort of securities.
Disadvantages of Secondary Market
Prices of securities during a secondary market are subject to high volatility, and such price fluctuation may cause sudden and unpredictable loss to investors.
Before buying or selling during a secondary market, investors need to duly complete the procedures involved, which are usually a time-consuming process.
Investors’ margin of profit may experience a dent thanks to brokerage commissions levied on each transaction of shopping for or selling of securities.
Investments during a secondary capital market are subject to high risk thanks to the influence of multiple external factors, and therefore the existing valuation may alter within a span of a couple of minutes.
Total Words: 1234
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