Note: Before you learn what is secondary market, 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 deals 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.
Secondary Market / New 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 then moved to the secondary market where it is traded between the public. Secondary market is also known as the After Issue Market.
Some of the people/entities involved in the secondary market:
- Stock Exchange
- 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 investor’s 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 with the 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.
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.
When two or more financial instruments are combined, they become hybrid instruments. An example of a hybrid instrument is a convertible debenture. It is a long-term debt product that gets converted into equity shares on a specified date.
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.
- A secondary market is a place where you can make a lot of money. But remember, everything has a catch to it.
- Secondary markets are volatile and far too many factors can impact the performance of the market. While you may be getting ready to begin trading at 9:15 am on any given day, some event in the USA can totally change the course of the Indian market from the previous closing.
- Also, a bull run can seem very tempting but you as investors should be prudent about the fundamentals of the company.
- At times, a stock or a sector may not be performing in accordance with your expectation. Don’t lose heart, there may be some unexpected factors.
- Secondary market trading is a daily battle and long war at the same time. Investors such as you need to have both outlooks in mind. You win a few battles and you lose some. The end goal is to win the war. Prudence and patience are the keys.