Role And Function Of Secondary Market, Advantages & Disadvantages Of The Secondary Market

functions of a secondary market
functions of a secondary market

In this article, we would understand what is meant by secondary markets with its features and lastly what are the functions of a secondary market.

What Is Secondary Market?

Secondary markets are the place of a market where the trade of financial instruments ( stocks, bonds, derivatives, ) obligations & claims is done that is available for buying and selling.

In the secondary market, investors can buy and sell the shares of a company listed on the stock exchange.

What Is Primary Market?

Now before moving further with the functions of secondary markets and its other aspects, let’s just understand what primary market is in order to know the difference between the primary market and the secondary market by the end of this article.

A primary market is a marketplace where the securities are created and issued at first or the primary markets are those markets that create new securities for the investors to purchase at first.

If any company wants to raise funds from the public, it raises funds through an initial public offering (IPO) in the primary market, where investors can buy the shares of the company.

The parties are involved in this purchase are the investors, Qualified institutional placement (QIB), and an underwriter.

Also Read: What is Secondary Market? Types, Pros & Cons Of Secondary Market

Functions Of Secondary Market/Stock Market

Now, in order to understand the features and functions of the stock market, we have to go through its meaning first, the secondary market is a place where the investors are free to buy or sell the shares without any interruption of the issuing company.

A secondary market is also known as stock market and aftermarket.
In other way, the aftermarket or the stock market, or the secondary market is a platform where the investors deal or trade (buy or sell) with the securities or shares that are already owned by the investors.

Here, the trade of securities is between one investor and other.
In these transactions or trade, the issuing companies of such securities do not involve or participate. Thus, the income generation in this market is via a sale of shares from one investor to other investors.

The basic function of a secondary market is buying or selling of securities between the investors where there is no role of issuing company.

The regulatory body of a secondary market is the Securities Exchange Board of India i.e. SEBI that safeguards the interest of entities or parties which are functional in the secondary market that are the retail investors, financial intermediaries, etc.

Lets sum up the functions of secondary market in the following points:

  • The secondary market assists as a reliable economic barometer because it tells about the condition of an economy, the affect on the prices of stocks or shares reflect the changes occurring in an economy. In other way the secondary market keeps a check on the pulse of an economy.
  • The valuation of the security can be done on the basis of factors like demand and supply. The stock market, being an economic mirror, helps in finding the value of financial instruments.
  • The secondary market contributes in the growth of economy because there are securities/ financial instruments are traded in stock exchange and this whole process of reinvesting and disinvesting assist to invest in most productive investment which leads to capital formation thus economic growth.
  • The other function of secondary market is providing safety to transactions or trade because the secondary market is operated by the rules and regulations.
  • It provides better trading practices as it encourages investing in ownership financial securities.
  • The function of secondary market is to ensuring and creating liquidity to the investors.
  • The main important function which secondary market performs is to giving the ready market for the purpose of buying and selling or trading of the financial instruments or securities.
  • Secondary markets serve in allocating the capital of investors to profitable channel.
  • Secondary markets inculcate the habit of savings and investing as it gives attractive option to investors for investing in various financial securities in order to earn returns by using their idle money.

Major Instruments Of Secondary Market

There are different instruments like fixed income instruments, variable income instruments, and hybrid instruments which are dealt in the stock market.

Fixed income instruments include bonds, debentures, and preference shares. Hybrid instruments include a combination of 2 or more financial instruments like convertible debentures. Variable income instruments include equity & derivatives.

Significance & Characteristics Of Secondary Market

There are some characteristics of secondary market which are given as below:

  • The secondary market determines the price which also make possible to find the value of financial instruments or securities.
  • Stock market or the aftermarket creates the liquidity to those securities issued in the primary market i.e. any investor is free to sell its shares or stocks as there are large numbers of parties who are ready to buy.
  • SEBI regulates the secondary market through rules and regulations that is to safeguards the interest of investors so, it is safe.

The significance of a secondary market can be summed up in the following points:

  • It gives liquidity to investors so that they can easily trade in securities or financial instruments.
  • The secondary market reflects the economic condition of the country as to whether there is a rise or fall in a secondary market thus if there is a boom or recession in the economy can be determined.
  • It assists in determining the price of securities.
  • It also seems like an alternative to savings because it gives chance to investors to invest their idle money in order to get returns.

Advantages And Disadvantages Of Secondary Market

There are some advantages of secondary markets which are as follows:

  • It assists in providing the economic condition of a country or it works as an economic mirror that reflects the economic condition of a country.
  • It helps investors by ensuring liquidity.
  • The valuation of a company can be determined easily with the help of the stock price of that company.
  • It provides profits to investors along with the ease of buying & selling the shares.

There are some disadvantages of secondary markets which are as follows:

  • There is a risk of sudden loss because of the high rate of fluctuations in price.
  • There are some policies of the government that work as an obstacle in the secondary market.
  • In order to buy or sell any financial instrument or securities, investors have to complete various formalities which make this entire process time-consuming.
  • Investors have to pay high fees or commissions to brokers every time they buy or sell any financial securities.

Difference Between The Primary Market & Secondary Market

Primay Market

Secondary Market

The term “ Issues market” is also used to refer primary market

The terms “Stock market, after market” are also used to refer secondary market.

It is a place where new financial instruments like securities and bonds are purchased by the investors from the company itself.

It is a place where the securities and bonds are bought or sold between the investors themselves.

There is involvement of the company issuing such securities.

Here the trade is done without the involvement of issuing company

The intermediaries are investment banks.

The intermediaries are brokers.

The prices of share are fixed at par value.

The prices of share may change as per the demand and supply.

The function of primary market is to originate, distribute and underwrite new securities for issue.

The function of secondary market is to create an available market for trade of securities between investors.

In primary market the selling of financial securities is done only for once.

The selling of financial securities can be done ‘n’ number of times in the secondary market.

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