What is Secondary Market?

What is Secondary Market?

Secondary market: secondary market is also known as the stock market or stock exchange. It is the market in which stock/shares of the companies are traded between investors without the intervention of the issuing company. In secondary market the transaction which are done among the investors, the issuing company does not participate in income generation, and the valuation of share is based on its performance in the market. Here income is generated by the sale of share from one investor to another.

Types of member in secondary market:

• Brokers
• Jobbers
• Bulls
• Bears
• Stag

Functions of secondary market:

• It provide liquidity to investors for their assets
• It provide the facility to the investors to check the price of various financial instrument like shares and bonds
• Secondary market provide a platform in which investors can trade on different securities like bonds, share, debenture and other financial instruments.
• Secondary market keeps the low transaction cost.

Types of secondary market :

There are two types of secondary market

• Over the counter (OTC)
• Stock exchange

Over the counter:

it is a market in which buyers and sellers engaging in trading in securities among themselves. Otc markets contain high risks as the parties directly deal with each other. In otc market stock of smaller companies are traded as they cannot meet exchange requirement for formal exchange

Stock exchange:

Stock exchanges are centralised platforms where securities trading take place, without any contact between the buyer and the seller. Whatever the transaction take place in the market are routed through a central source (exchange).

Different Instruments in the Secondary Market

There are three instruments of secondary market:

1) Fixed income instruments

2) Variable income instruments

3) Hybrid instruments

Fixed income instruments:

Fixed income instruments are mainly debt instruments like debenture, bonds and preference share.

Debenture:

Debenture are long term bonds or debts instruments which are unsecured by collateral  that a firm/company issue without the pledge of assets. Debenture are issued by corporates and government to raise capital.

Bonds:

Bonds are debt security which are issued by government and corporates when they want to raise capital or funds. Bonds are purchased by investors which enable entity to raise large amount of fund and fulfil capital requirement. By purchasing bond Investors are paid interests at fixed intervals, and the principal is repaid on maturity.

Preference shares:

Preference share is also known as preferred stock, it is the special type of share in which the dividend are paid to shareholder before to the issuance of common stock dividends.

Variable income instruments:

Variable income instruments is the type of investment which provide its investors with a rate of return that is dynamic and determined by market forces. These securities provide high return to investors as thy are highly risky. Example equity and derivative.

Hybrid instruments:

it is a security which combine two or more different financial instruments. Convertible debentures is an example of hybrid instruments.

Advantage and Disadvantage of Secondary Market

Advantages of Secondary Market

• It allow investors to make profit in short period of time
• The stock price of the company describe the performance of the company
• In secondary market trades can start trading with small amount
• Secondary markets help in analysing the economic condition of the country
• Secondary market ensure liquidity for the investors as investor can buy or sell securities easily
• Secondary markets help investors to know the economic health of a company. 
• Funds of investors are safe in secondary market due to heavy regulations governing asecondary stock market

 Disadvantages of Secondary Market

• In secondary market price fluctuations of stocks are very high, which can lead to loss
• In secondary market buying and selling of stock is a time consuming process, as investors has to complete the process involved.
• At the time of buying and selling of securities, investors has to pay brokerage to broker
• Sometimes, government policies may effect the secondary markets