What is Secondary market?

Capital Markets can be divided into Primary Market and Secondary Market.

Secondary market

  • Secondary Market refers to a market where securities are traded after being initially offered to the public in the primary market and/or listed on the Stock exchange.
  • It is also called as aftermarket.
  • Majority of the trading is done in the secondary market.
  • It comprises of Equity Markets and Debt Markets.

What is the role of Secondary market?

  • For the general investor, the secondary market provides an efficient platform for trading of his securities.
  • For the management of the company, secondary equity markets serve as a monitoring and control conduit by facilitating value-enhancing control activities, enabling implementation of incentive-based management contracts, and aggregating information (via price discovery) that guides management decisions.

Functions of the Secondary market

  1. Accuracy Function: Price accuracy can reduce the agency costs of management and make hostile takeovers a less risky proposition and thus move capital into the hands of better managers. Accurate share price aids the efficient allocation of debt finance whether debt offerings or institutional borrowings.
  2. Liquidity function: The greater the number of investors in the secondary market, more the liquid market. Continuous trading in after-market keeps it highly liquid.
  3. Price Discovery function: It provides the instant valuation of securities caused by the changes in the environment.

Difference between Primary and Secondary markets

Primary MarketSecondary Market
Issuer directly sells new security to InvestorTrading of security between Investors takes place
New Issue MarketAfterMarket
Security sold by Issuer only onceSecurities can be sold multiple times
Underwriters are intermediariesBrokers are most important intermediaries
Middlemen type of marketAuction and Dealer type markets

Major Players in Secondary Market

  • Brokerages and Advisory Services
  • Commission Broker
  • Jobber
  • Floor Broker
  • Taraniwalla/ Stag
  • Odd lot dealer
  • Budliwala
  • Arbitrageur
  • Security dealers
  • Financial Intermediaries: Commercial Banks, Development Financial Institutions, Insurance Company, Mutual Funds, Non-banking Financial Companies (NBFC)
  • Individual/ Retail Investors

Major Instruments in Secondary Market

Fixed Income Instruments:

  •    Bonds
  •    Debentures
  •    Term/Fixed Deposit
  •    Preference stock
  •    Mortgage backed of Asset backed securities
  •    Life Insurance    Annuity Pension Plan

Variable Income Instruments:

  • Equity
  • Derivative

Hybrid Income Instruments:

  • Mutual Fund
  •  Basket D (75% Equity + 25% loan)
  •  Convertible Preferential Share

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