Introduction to Secondary Market
Secondary market is where the shares issued by the company during the IPO are traded by investors. This trading contributes to the share valuation of the company where there is no intervention by the company, where it does not participate in income generation. It is an investor based platform.
Understanding Secondary Market
Secondary markets are the markets where investors are able to trade without restrictions, but with some regulations. Shares that are already owned are bought and sold; bonds and debentures are debt instruments, and preference shares are traded as fixed income sources. The other instruments traded are variable income instruments that pose higher risk, like equity and derivatives. Hybrid instruments such as debt to equity, and vice versa convertible instruments, are also traded among willing investors.
The primary participants of the market include retail investors, advisory service providers, brokers, financial intermediaries and non-banking firms. These participants use the secondary market as a platform to make profits during the day trade of these financial securities. Within the fixed time frame, i.e. Monday to Friday, from 9:15AM to 3:30PM in India, investors can enter into any transaction and make use of the market’s liquidity to make money.
Secondary markets are important signages of the growth of the economy since they mobilise individual savings into investment, helping fund the companies by way of purchasing securities. There are markets within the secondary market and the most common of them is the Stock Exchange. OTC markets, auction markets, commodities, dealer markets exist under the secondary market radar too.
Highlights of Secondary Market
- Investors in the secondary market transact among themselves. The company is not involved at all, and shouldn’t be as per the guidelines of SEBI.
- Investors understand that trading in the secondary market is subject to high volatility, which makes up a significant part of market risk.
- The market risk is the caution that investors bear about losing their money, right in parallel to knowing that secondary market transactions yield skyhigh returns and serve as making quick money in an intraday trading session.
- Most instruments on the stock market are pooled into mutual funds, where less interested/beginners/less-knowledgeable investors can indirectly participate in the market to make money in the long term.
- Stocks on the secondary market are traded multiple times at a price determined by the market forces, unlike in the primary market.
