What Is Secondary Market? Types, Pros & Cons of Secondary Market

What Is Secondary Market?

Have you ever heard about “Secondary Market”? This term is very familiar among the Investors and Traders in the Stock Markets. It’s a type of market but very different in comparison to Primary Market.

The secondary market is where the investors can buy and sell securities they already own or they want to own. In simple words, investors can freely trade in shares without any special permission from the issuing company.

The transactions made in the Secondary market among investors have no business to do with the underlying company. Buying & Selling of shares in this market is done on the basis of market structure and News inflow instead of Valuation and future outlook.

There are many entities that are functional in the secondary market–

  • Broking companies & Advisory service providers
  • Banks & Investment Banks
  • Asset Management Companies & Mutual Fund houses
  • Retail investors & High net worth individuals (HNIs)

Types of Secondary Market

Mainly Secondary Markets are of two kinds –

  • Stock exchanges and
  • Over-the-counter markets.

Stock Exchange

A stock exchange or securities exchange is an exchange where the stockbrokers and traders can buy and sell securities, such as shares of companies, bonds, and other financial instruments. National stock exchange (NSE) and Bombay stock exchange (BSE) are examples of such platforms in India.

Transactions done via a Stock exchange is assured itself by the exchange, Hence the counterparty risk is almost negligible. Also, there are statutory bodies that regulate these exchanges. For example, SEBI or “Securities and Exchange Board of India” regulates Indian Exchanges.

Over-The-Counter (OTC) Market

Over-the-counter markets are different from the Stock exchanges in many terms. Where Secondary Markets are centralized by the government of the country OTC is Decentralized, As a result, they are more volatile and risky in nature.

Here the Buyers and sellers directly deal with each other. Foreign exchange market commonly known as “FOREX” is an example of an over-the-counter market.

Also Read: Role And Function Of Secondary Market

Pros of Secondary Market

Liquidity: Secondary Markets have sufficient liquidity almost every time, unlike Primary markets. So, if an investor needs some money urgently, he can sell the shares held quite easily and get the cash.

⦁ Eased Mobilisation: Nowadays these Securities are held in Digital Depositories. Resulting in eased carrying for investors. They can access or transfer these digital receipts from anywhere in the World.

⦁ Enough Safety: Secondary Market is heavily regulated by SEBI. So that Investor’s funds remain safe.

⦁ Current Valuation: Secondary market is often used to analyze the fair valuation of a company. Although the value of a share can be under as well as overvalued at times due to news inflows etc.

Cons of Secondary Market

High Volatility: The Prices of stocks moves vigorously at times, which can lead to sudden loss of the investor.

⦁ Commissions: There are plenty of commissions in the secondary market such as Brokerage, STT charges, DP Charges SEBI Charges, etc. These charges impact the profit margin of the Traders.

⦁ High Risk: As stated above Secondary market is highly volatile in nature. That’s why Investments in a Secondary market are subject to high risk.

Characteristics of Secondary Market

The fundamental need of a Stock Exchange is to provide a platform to Traders & Investors so that they can Trade and Invest in different financial instruments such as Stocks, bonds & debentures, etc.

⦁ Creates attractive opportunities for investment in various securities. Hence we can say that Secondary Markets promote the habits of savings and investments among the people.

⦁ Also, the values of different securities are determined on the basis of their current price in the Secondary market.

⦁ One more function is to induce and increase Liquidity among the Investors.

⦁ Lastly, Secondary Market or the Stock market Index is considered an indicator of a nation’s economy. This means if the Stock markets are moving Higher, the Economy is doing well, and Vice-versa. For example, NIFTY50 & SENSEX are two benchmark indexes for the Indian Economy.

FAQ- What Is Secondary Market?

Q. Who regulates the secondary market?

In India Secondary markets are regulated by SEBI which is a Government statutory body established under Section 3 of SEBI Act 1992 to protect the interests of the investors in securities.

Q. Is the secondary market risky?

The Secondary Market is a very volatile place with full of uncertainties. It offers great opportunities in the market and Hence extremely Risky too. Even blue-chip stocks have corrected 5-10% in a single day at times.

Q. What are the benefits of secondary market?

Major benefits of Secondary markets are as follows-

⦁ It offers great trading & investing opportunities to investors.
⦁ It establishes standards for valuing the underlying company and stock price.
⦁ Secondary Markets creates liquidity between buyers & sellers

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He is pursuing BBA, a Passionate trader and his hobby is to write content on business and finance.

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