Introduction
Unbeknownst to the novice trader, the stock market actually operates in two tiers: the primary stock market and the secondary stock market. Both these tiers are equally good platforms for investment, and you stand to gain good profits if you know how to navigate your way around. The only major difference between the primary and secondary stock market is that while the primary market is concerned more with the creation and issuance of securities, the secondary market is where all the trading happens.
You may not have been aware of the fact that the Bombay Stock Exchange is actually a secondary market. Let’s learn a little more about the secondary stock market.
What is Secondary Market?
The secondary market is what you typically know as the common stock market. This is the space where investors trade in the market securities they own. There is no intervention of the issuing company in the secondary stock market (the companies that issue stock majorly play in the primary stock market). In short, you can think of the secondary market as being analogous to a marketplace where sellers sell branded goods to buyers (brands being the entities issuing those goods to sellers).
The share prices and their performance is based on the trends in the secondary market. You can find retail investors, insurance companies, banks, mutual funds, brokers and security dealers as entities operational in the secondary market.
Differences Between Primary and Secondary Markets
Certain key differences between how stocks behave set the primary and secondary markets apart from each other. Let’s see how.
- The primary market is also known as Net Issue Market or NIM. The secondary market is also known as After Issue Market, or AIM
- The principal role of the primary market is the creation and issuance of stock and shares. The principal role of the secondary market is trading in the shares issued in the primary market
- Investment banks act as intermediaries in the primary market whereas in the secondary market, brokers do this job
- Companies sell their shares directly and for the first time to investors in the primary market. Secondary market is where investors sell and buy stock among themselves
- In the primary market, the price of shares is fixed at par value. The secondary market is volatile and share prices keep fluctuating
Let’s now understand various types of secondary markets available for investment.
Types of Secondary Markets
Secondary market is a place where a majority of stock trading happens. It is of two types: the Stock Exchange market, and the Over-The-Counter market. Let’s understand both these markets in detail.
The Stock Exchange
Stock exchanges are secondary markets of a massive scale that a high percentage of the population participates in for trading. In India, the best examples of secondary markets are the National Stock Exchange and the Bombay Stock Exchange.
Secondary markets are associated with uncompromising regulations regarding market securities, making them a place with low counterparty risks. However, this increases the fees, transaction costs and commissions associated with them. Most of the market indices you see (like Nifty 50 or S&P 500) can be found listed in the secondary markets.
The stock exchange assists trading in secondary market, acting as a guarantor.
Over-The-Counter Market
The over the counter secondary market is a place where the stock exchange is not involved. This is a platform where investors trade among themselves with the shares that they own. Since there is no regulatory authority or compulsion involved with this manner of trading, the counterparty risks in over the counter trading are typically high. Also, there is no standardization of share prices, since it varies from one owner to another (the buyer and the seller directly deal with each other regarding all terms and conditions of a trade contract).
You may not have known that FOREX (Foreign Exchange) comes under Over The Counter market.
Functions of The Secondary Market
The secondary market is where the major chunk of stock trading happens. This basically functions as a platform that gives the opportunity to the masses to invest in company stocks. The secondary market also functions as an enabler of active, continuous trading that helps keep assets liquid and price variations in check. That being so, the secondary market also serves as a medium for investors to generate quick cash by selling off the shares they own.
In helping discover prices of shares based on demand and supply, the secondary market functions as a medium of price determination.
The secondary market also functions as an organized place where investors can invest their money in market securities with some sort of regulatory safety net in place. The secondary market, in a way, reflects the state of the economy of a nation.
Conclusion
The secondary market is the place you most likely refer to as the stock market. This is where you go when you wish to trade in market securities. It may be secondary only in concept; the market functions as the backbone of stock trading in India – it is where investors gather and give the indices the trends they have – whether bull or bear, it all happens on the secondary market.
Stock exchanges like NSE and BSE are also counted as secondary markets as this is where the issuing company isn’t involved in dealing with the shares it has issued.