A secondary market is a market in which assets such as stocks, bonds, mutual funds, and other investment vehicles are exchanged on a daily basis.
Before you learn what is a secondary market in detail, you must learn how the primary market works. We have a detailed piece here: What is primary market?
Do you want Mukesh Ambani, Anand Mahindra, Kumar Mangalam Birla, or Kiran Mazumdar-Shaw to work for you? Or does it sound hilarious?
This is not a joke. You can very well take ownership in their companies, and as Ambani signs deals after the deal or Shaw expands Biocon business amid covid-19, you sit tight, and you will still make money.
How? All you have to do is buy some shares of these companies and become a part-owner. Where do you do it? You do it in the secondary market. This is a fun place to be. With some good insights, tactics, and a bit of luck, you can create a huge corpus for yourself.
Let’s understand all about the secondary market.
Content:
- Secondary Market Meaning
- Types of Secondary Market
- Secondary Market Instruments
- Advantages of Secondary Market
- Disadvantages of Secondary Market
- Quick Summary
- FAQ(Frequently Asked Questions)
Secondary Market/After Issue Market Meaning
A secondary market is a place where securities like stocks, bonds, mutual funds, etc., are traded on a day-to-day basis. These products are first issued in the primary market via IPO and then moved to the secondary market, where it is traded among the public. The secondary market is also known as the After Issue Market.
Some of the people/entities involved in the secondary market:
- SEBI
- Stock Exchange
- Depositories
- Banks
- Stock Brokers / Depository Participants
- FDI & DII
- Retail Investors / Traders
Types Of Secondary Market
There are two types of secondary markets:
- Exchange Traded Market/Online Trading
- Over-The-Counter or OTC Market
Exchange Traded Market/Online Trading
Exchange is a type of secondary market where the financial instruments are listed, and there is no direct contact between the seller and the buyer of the securities. Usually, stockbrokers help you in buying and selling these financial instruments via an online platform. Using an online platform is just like logging onto amazon or Flipkart and buying stuff.
All you need is the internet, mobile or laptop, and some money to trade. That is it. You can trade from anywhere and whenever you want. Exchanges are highly regulated by SEBI, and investors’ safety is highly adhered to.
Over-The-Counter or OTC Market
OTC market is an unorganized marketplace where securities of non-listed companies or any other type of goods are traded on a one-to-one basis. Here, a buyer and seller set up their own rules and regulations for the agreement. It’s just like entering into an agreement with your friend through word of mouth.
Transacting in OTC Market is highly risky as it is not regulated. OTC Markets are prone to counterparty risks where one of the parties might fail to abide by the rules of the financial agreement.
Secondary Market Instruments
Secondary market consists of three instruments:
- Fixed income instruments
- Variable income instruments
- Hybrid instruments
Fixed Income Instruments
Fixed income instruments are debt/loan instruments that are issued by the government, corporates, etc. to raise funds for various purposes like building a road, meeting the capital expenditure. When you buy such instruments, you will be paid fixed interest, and upon maturity, the principal amount will be paid back.
Some examples of fixed-income securities: Bonds and Debentures.
If you are looking for a more clear and more detailed outlook on what are bonds, how do bonds work, and where to buy them? Then you must read this article on What is Bond Market?
Variable Income Instruments
Usually, stocks are considered as Variable income instruments. These financial instruments do not assure fixed interest and do not have a maturity date. Once you buy the shares of a company, you will be entitled to profit-sharing, dividends, voting rights, and the risks associated with them.
Hybrid Instruments
When two or more financial instruments are combined, they become hybrid instruments. An example of a hybrid instrument is a convertible debenture. But do you know what is debenture? We knew this question would come, and so we have provided you the link to the complete article dedicated to Debentures.
Advantages of Secondary Markets
- Secondary market offers investors to earn good profits in a shorter period compared with other investment avenues.
- Secondary market is quite liquid, where buyers and sellers are available easily.
- The stock price helps the investors assess a company’s performance effectively.
- The Secondary market is every man’s destination as huge sums of money are not required to trade here.
- Secondary market is safe as it is regulated by a governing body (SEBI in India).
Disadvantages of Secondary Markets
- The secondary market is volatile. Hence sudden loss becomes a real possibility.
- Investors have to pay brokerage fees every time they buy or sell. The fee can be very high at times, depending on the volume and amount of the trade made.
Quick Summary
- Secondary market, also known as the After Issue Market is a place where securities like stocks, bonds, mutual funds, etc are traded on a day-to-day basis. These products are first issued in the primary market via IPO and then moved to the secondary market where it is traded by the public.
- There are two types of secondary markets:
- Exchange Traded Market/Online Trading: Exchange is a type of secondary market where the financial instruments are listed and there is no direct contact between the seller and the buyer of the securities.
- Over-The-Counter or OTC Market: OTC market is an unorganized marketplace where securities of non-listed companies or any other type of goods are traded on a one-to-one basis.
- The secondary market instruments are of three types:
- Fixed income instruments: These are debt/loan instruments that are issued by the government, corporates, etc. to raise funds for various purposes like building a road, and meeting the capital expenditure.
- Variable income instruments: Usually, stocks are considered Variable income instruments. These financial instruments do not assure fixed interest and do not have a maturity date.
- Hybrid instruments: When two or more financial instruments are combined, they become hybrid instruments. An example of a hybrid instrument is a convertible debenture.
- Advantages of Secondary Market
- Secondary market offers investors to earn good profits in a shorter period, compared with other investment avenues, and offers good liquidity.
- The secondary market is safe as it is regulated by a governing body (SEBI in India).
- Disadvantages of Secondary Market
- The secondary market is volatile, hence sudden loss becomes a real possibility.
- Investors have to pay brokerage fees every time they buy or sell. The fee can be very high at times, depending on the volume and amount of the trade made.
FAQ(Frequently Asked Questions)
1. How Companies Benefit From Secondary Market?
The company offers stock shares in the secondary market which enables them to raise funds for their business, avoiding loans, debts, and heavy interest payments. This is beneficial for investors as well, as they can buy and sell shares to make profits. resulting in increased share prices.
2. Is Secondary Market Risky?
Investing in Share Market is seen is seen as a risky affair. it requires deep knowledge about the market and its technicalities. You should take wise decisions and do proper research to benefit from the market.
3. Is Primary Market Better Than Secondary?
Both of them serve different purposes, and both are significant in their own ways. But which one is better for you should be decided on the type of investor you are. All we can do is give you a detailed comparison of the two markets, and you decide for yourself.
We hope that you are clear about the topic. But there is more to learn and explore when it comes to the stock market, and hence we bring you the important topics and areas that you should know:
