Secondary Market

Secondary Market

The Secondary Market is the part of the capital market where securities that have already been issued are bought and sold among investors.

Unlike the primary market, the company does not normally receive money from these transactions. The money paid by the buyer goes to the investor who sells the security.

Example: Ravi buys shares of a company through an IPO. Later, he sells those shares to Priya on a stock exchange. This transaction takes place in the secondary market.

How Secondary Market Works

Seller → Sells Existing Securities → Buyer Purchases Them → Money Goes to Seller

Features of Secondary Market

• Trading of Existing Securities: It deals mainly with securities that have already been issued.
• Investor-to-Investor Transactions: Securities are generally bought and sold between investors.
• Provides Liquidity: Investors can sell their securities when they need money, subject to market conditions and availability of buyers.
• Price Determination: Prices of securities change according to demand and supply and other market factors.
• Stock Exchanges: A large part of secondary-market trading takes place through recognised stock exchanges such as NSE and BSE.
• Regulated Market: The securities market is regulated by SEBI to protect investors and promote fair and transparent trading.

Types of Secondary Market

The secondary market can broadly be divided into two types:

Stock Exchange Market

• It is an organised and regulated market where listed securities are bought and sold through recognised stock exchanges.
• Examples include NSE and BSE in India.
• Ravi buys listed shares of Reliance Industries through NSE from another investor.

Over-the-Counter Market

• The Over-the-Counter (OTC) Market is a market where securities are traded directly between buyers and sellers or through dealers.
• The terms and prices of transactions may be negotiated between the parties.

Benefits of Secondary Market

• Investors can buy and sell listed securities through stock exchanges.
• Provides Liquidity: Investors do not necessarily have to hold securities for a long period and can sell them when required.
• Helps in Price Discovery: Continuous buying and selling helps determine the market price of securities.
• Encourages Investment: The ability to sell investments relatively easily can encourage people to invest in securities.

Limitations of Secondary Market

• Price Fluctuations: Security prices can rise or fall quickly, creating a risk of loss.
• Affected by Market Sentiment: Prices may be influenced by news, expectations, rumours and investor behaviour.
• Speculation: Too much buying and selling only to make quick profits from price changes can cause sharp movements in security prices.
• No Fresh Capital to Company: Normal secondary-market transactions do not provide new funds to the company, as money changes hands between investors.

Primary Market vs Secondary Market