Secondary Market
What Is a Secondary Market?
The secondary market is where investors buy and sell securities they currently own. It is a great many people's thought process of as the "stock market," however stocks are likewise sold on the primary market when they are first issued. The national exchanges, for example, the New York Stock Exchange (NYSE) and the NASDAQ, are secondary markets.
Grasping Secondary Market
However stocks are perhaps of the most commonly traded security, there are likewise different types of secondary markets. For instance, investment banks and corporate and individual investors buy and sell mutual funds and bonds on secondary markets. Elements like Fannie Mae and Freddie Mac likewise purchase mortgages on a secondary market.
Transactions that happen on the secondary market are named secondary just on the grounds that they are one step eliminated from the transaction that initially brought up the securities in issue. For instance, a financial institution composes a mortgage for a consumer, making the mortgage security. The bank can then sell it to Fannie Mae on the secondary market in a secondary transaction.
Primary versus Secondary Markets
Understanding the qualification between the secondary market and the primary market is important. At the point when a company issues stock or bonds interestingly and sells those securities straightforwardly to investors, that transaction happens on the primary market. Probably the most common and acclaimed primary market transactions are IPOs, or initial public offerings. During an IPO, a primary market transaction happens between the purchasing investor and the investment bank underwriting the IPO. Any proceeds from the sale of shares of stock on the primary market go to the company that issued the stock, in the wake of accounting for the bank's administrative fees.
Assuming these initial investors later choose to sell their stake in the company, they can do as such on the secondary market. Any transactions on the secondary market happen among investors, and the proceeds of every sale go to the selling investor, not to the company that issued the stock or to the underwriting bank.
Secondary Market Pricing
Primary market prices are much of the time set in advance, while prices in the secondary not set in stone by the essential powers of supply and demand. In the event that the majority of investors accept a stock will increase in value and race to buy it, the stock's price will regularly rise. In the event that a company loses favor with investors or neglects to post adequate earnings, its stock price declines as demand for that security decreases.
Various Markets
The number of secondary markets that exists is continuously expanding as new financial products become accessible. On account of assets, for example, mortgages, several secondary markets might exist. Heaps of mortgages are frequently repackaged into securities like GNMA pools and resold to investors.
Features
- Through enormous series of independent yet interconnected trades, the secondary market drives the price of securities toward their genuine value.
- In secondary markets, investors exchange with one another as opposed to with the responsible entity.
