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What is a Secondary Market?

2017-04-01T11:11:19+00:00

The term 'Secondary Market' is included in the Economics edition of the Financial Dictionary. Get yours now on amazon in ebook or paperback format. Read more here...

The secondary market refers to that securities trading market in which investors are able to purchase and sell securities that they own. Most individuals would simply call this the stock market. It is also true that stocks are additionally sold on the primary market at their first time and point of issue. Secondary markets in the United States include the NASDAQ and NYSE New York Stock Exchange. In Europe they include London’s FTSE, the Euro Next, and Germany’s Deutsche Bourse.

There are more than simply stocks traded on the secondary market. Stocks do prove to be the most heavily traded securities on these exchanges. Other types of securities available on such markets include bonds and mutual funds. Individual and corporate investors along with investment banks both sell and buy all three types of securities on the secondary markets. Besides this, Freddie Mac and Fannie Mae the GSE government sponsored enterprises buy mortgages on such a secondary market.

These transactions that take place on this secondary market are simply a step away from the original transaction which created the relevant securities in the first place. Looking at an example of this process helps to clarify it. JP Morgan will underwrite mortgages for customers. This actually creates the mortgage which is a security. JP Morgan might then choose to sell the mortgage security on to Freddie Mac in a secondary transaction in this market.

There are important differences between the primary and secondary markets. In the cases where corporations issue their bonds or stocks initially and then sell them directly to various types of investors, this is a primary market transaction. IPOs initial public offerings remain among the best-known and most heavily advertised transactions of the primary market. In such an IPO, the transaction occurs directly between the investment bank IPO underwriter and the buying investor. All resulting proceeds that come from the stock shares would then be delivered to the issuing company directly. The bank would subtract any agreed upon administration costs before handing over the funds.

Later on in the life cycle of these new stock shares, the first investors might opt to sell their individual stakes in the corporation. They would do this on the secondary market. All such transactions occur between investor parties. This means that the resulting proceeds from sales accrue to the investor re-selling the stock. They do not go back to the firm which originally issued the security nor its underwriter investment banks.

In general, prices on the primary market will be pre-arranged in advance of the transaction. Those prices from the secondary market are arranged by the interaction of supply and demand forces. When most investors are convinced that a given stock will rise in value and decide to race out to purchase it, this causes the stock price to rise generally speaking. When investors decide a company is out of favor or it is unable to deliver strong enough earnings results, then the stock price drops as the demand for such a security evaporates.

There are many more secondary markets than just one. The numbers are constantly going up because new financial securities always appear on the markets. Where mortgage assets are concerned, there are a few different secondary markets that exist. This is in part due to the fact that clever investment banks created bundles of mortgages. They then engineered these bundles into securities like MBS and GNMA pools. Finally they resell these to investors on the secondary markets.

The secondary market can also be subdivided further down to two other types of markets. These are the auction market and the dealer market. The auction market is a physical place like a stock market exchange where they bid on and sell securities publicly. The dealer market on the other hand involves purchasing and selling securities via electronic networks which are run over phones, customized order routing machines, or fax machines.

The term 'Secondary Market' is included in the Economics edition of the Financial Dictionary. You can get your copy on amazon in Kindle or Paperback version. See more details here.