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
- 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.
- 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.
- Price Discovery function:
It provides the instant valuation of securities caused by the changes in the environment.
Difference between Primary and Secondary markets
| Primary Market | Secondary Market |
|---|---|
| Issuer directly sells new security to Investor | Trading of security between Investors takes place |
| New Issue Market | AfterMarket |
| Security sold by Issuer only once | Securities can be sold multiple times |
| Underwriters are intermediaries | Brokers are most important intermediaries |
| Middlemen type of market | Auction 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