Secondary Market: Meaning, Types, Advantages And Disadvantages

Secondary Market: Meaning, Types, Advantages And Disadvantages

In the secondary market, previously issued securities are traded on the share market. The exchange provides a platform for investors to trade shares, bonds, and other securities. Moreover, secondary markets are also called aftermarkets. 

In this article, we will examine What is the secondary market meaning, and the types of aftermarket. We'll also discuss its advantages, such as liquidity and price discovery, as well as its limitations. Having a thorough understanding of what is the secondary market will enable you to navigate the complexities of investing and make informed financial decisions.

What Is The Secondary Market?

A secondary market is a place where shares of companies are traded between investors. Basically, a secondary market means investors can buy and sell shares without the company interfering. In these transactions, the issuing company doesn't generate income, and its shares are valued more based on performance in the market. Thus, in this market, income comes from selling shares to other investors.

In an aftermarket, you'll find these entities:

  • Retail investors.
  • Commission brokers, security dealers, and other advisors.
  • Intermediaries, like non-banking financial companies, insurance companies, banks, and mutual funds.

To put it simply, the secondary market definition refers to the marketplace where previously issued securities are bought and sold by investors, rather than directly from the issuing company. So, after learning secondary market meaning, let's understand the types of aftermarket.

Types Of Secondary Market

Two types of aftermarkets exist - stock exchanges and over-the-counter markets.

Stock Exchange

Stock exchanges are centralised platforms where securities are traded, without any buyer-seller contact. In India, two such markets are the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).

Additionally, trading in securities on stock exchanges is regulated strictly. Almost no counterparty risk exists since the stock exchange acts as a guarantor. To achieve such safety, commissions and exchange fees are imposed on investments in the form of a higher transaction cost.

Over-The-Counter Market

Markets over the counter, or OTC, are decentralised. They are composed of participants who conduct trades among themselves. Due to the lack of regulatory oversight, OTC markets retain higher counterparty risks. One example of an over-the-counter market is FOREX.
 

Moreover, there's a lot of competition in the OTC market to get more volume. As a result, the price of securities varies from seller to seller.

In addition to stock exchanges and OTC markets, auction markets and dealer markets are also aftermarket. In the former, buyers and sellers negotiate the rate at which securities will be traded. All pricing information, including bidding prices, is public.

Another type of aftermarket is the dealer market, where dealers quote prices for specific securities. The dealer market is where foreign exchange and bonds are traded.

Advantages Of Secondary Market

Investors, issuers, and the entire financial system benefit from aftermarket transactions. Among the main benefits are:

The Market Provides Liquidity For Investors

By allowing investors to buy and sell previously issued securities, the market provides liquidity for investors. As a result, investors are able to easily adjust their portfolios in response to changing market conditions, as well as access cash quickly if required.

Facilitates Price Discovery

By allowing investors to trade securities according to market dynamics, this market facilitates price discovery. By doing so, investors receive fair value for their investments and securities are priced efficiently.

Transactions Are Transparent

The market transactions tend to be transparent, with investors being able to easily discover information about the securities, the issuers, and the trading volume. As a result, investors can make informed investment decisions based on well-informed information.

Allows Investors To Transfer Risk 

By buying and selling securities on the market, investors can transfer risk. For instance, the stock owner who is concerned about the possibility of a market downturn could sell the stock to another investor. Thus, transferring the risk to that investor.

Facilitate Capital Raising 

It can help companies raise money by issuing new securities to investors. Secondary offerings or follow-on offerings can be used for capital raising.

Offers A Wide Range Of Investment Opportunities For Investors

A wide range of investment opportunities makes it possible for investors to diversify their portfolios and potentially increase their returns.

Disadvantages Of The Secondary Market

Despite the advantages of this market, investors should be aware of some disadvantages as well.

The Market Can Be Volatile

Prices of securities fluctuate rapidly in this market in response to changes in market conditions, investor sentiment, and other factors. As a result, investors may have difficulty predicting the value of their investments due to this uncertainty.

Vulnerable To Market Manipulation

There is a danger that the market can be manipulated, such as insider trading or other fraudulent activities, which can cause price distortions and harm investors.

Investors Are Exposed To Counterparty Risk

Investors are exposed to counterparty risk in this market transaction, which is the risk that the other party may not fulfil its obligations. Over-the-counter (OTC) markets lack a central clearinghouse to guarantee trades, making this situation particularly difficult.

Limited To Certain Types Of Investors

Individual investors may be unable to access certain aftermarkets due to restrictions on accredited investors or institutional investors.

Governmental Authorities Regulate Transactions

Government authorities regulate this market transaction, and regulatory changes can affect the market's functioning and the value of securities.

There Is A Discrepancy In Prices

There can be discrepancies and misalignments between market prices and fundamental values when security is priced.

Conclusion

It is important to understand secondary market meaning in the world of investment. The secondary market definition refers to a place where investors buy and sell previously issued securities, such as shares, bonds, and other instruments. It provides liquidity, facilitates price discovery, facilitates risk transfer, and provides a wide range of investment opportunities.

You can leverage innovative tools like the blinkX share market app to navigate the complexities of the secondary market. This user-friendly app provides seamless access, enabling you to stay informed, execute trades efficiently, and manage your investment portfolios effectively.

Secondary Market FAQs

In this market, investors buy and sell securities. Stocks are traded between investors and traders rather than from companies that issue them.

The National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) are the two secondary markets in India.

The Securities and Exchange Board of India (SEBI) controls the secondary market in India.

A secondary market provides liquidity to investors, which is why they are important.

Stock exchange, OTC (Over the Counter), auction, and dealer are the 4 types of secondary markets.