Secondary Market: Meaning and Its Types

Imagine you have tickets to your favourite artist’s concert or stand-up show but are unable to go. Do you let your hard-earned money go to waste? Nah! You decide to see if you can sell it to someone who would like to go instead. 

But, what if you could do the same thing with financial assets and securities? Turns out, you can! And it is called a secondary stock market transaction.

What is a secondary stock market?

Simply put, a secondary stock market is where investors can buy and sell shares directly among each other. This means they don’t need to involve the company whose shares are being traded. The trades here are conducted at the market price of the shares which are, in turn, based on the performance of the company. 

There are 3 key players in such a market:

• The investors involved in the trade
• Any advisory entities or brokers like commission brokers, security dealers and others and
• Financial intermediaries like NBFCs, banks, insurance companies etc provide services like 
  • brokerage and trading services, 
  • liquidity, 
  • distribution and custodial services and much more.  

What Types of Secondary Markets Exist in India?

The main types of secondary markets in India include:

Stock Market 

The market for all things equity. It includes both the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) as the platform for trade. 

Bond Market 

If you traded in debentures, government bonds and/or corporate bonds, you’d be trading in the bond market

Derivatives Market

This market includes assets and securities that are a little more complex. They include future contracts and options contracts based on various securities. This market gives investors the extra advantage of actions like speculating, risk management and hedging. 

Commodity Market

True to its name, this is the place to deal in commodities. These could include gold, agricultural products, crude oil and more. The major platforms to transact in commodities include the Multi Commodity Exchange (MCX) and the National Commodity and Derivatives Exchange (NCDEX).

Forex Market

In the forex market, investors can either trade in currencies or speculate on the fluctuations in the currencies. 

Does the secondary stock market serve any function?

The secondary stock market serves many functions and generates a fair amount of impact too! 

Helping create liquidity:

One of the main functions of a secondary market is to allow investors to generate liquidity. The transactions in primary markets come to a halt when securities are initially issued and sold. Allowing investors to sell these securities helps them dispose of assets they are no longer interested in.

Price identification:

The Secondary Market encourages investors and traders to transact based on two categories of factors:

• Verified factors like 
  • Company Performance and 
  • Economic Conditions 

and,

• Other factors like 
  • Market Sentiment and 
  • Investor Expectations, 

This helps in discovering a transparent and efficient price point. After this, using supply and demand to base the price of assets has been helpful to keep prices fair.

Magnifying Market’s Efficiency:

The secondary stock market enhances the efficiency of the market. It does so by connecting potential buyers of a specific asset to its sellers. Three features that help in doing so include:

• Reducing transaction costs, 
• Setting up a centralised platform for trade and 
• Facilitating speedy and smooth transactions

Additionally, the secondary market also improves market liquidity by creating space for large volumes of transactions. 

Offering Diversity:

The secondary stock market helps investors to diversify. This is perhaps their most interesting function. Investors have access to includes stocks, bonds, derivatives, and even ETFs! 

Effective Source of Capital:

The secondary stock market can be a boon for companies too! While most of the primary market helps companies raise a handsome amount of capital, they might need more. These could be to repay debt, conduct or expand their research and development or just expand. This is where the secondary market can step in and make a difference.

Managing Risk: 

Minimising risk is a core component of financial decision-making. Through the secondary stock market, investors can decide how to manage their risk exposure. They can buy and sell securities to help adapt their strategy to changing market conditions, and economic conditions. Personal motives will also play a role in designing their stock market strategy.  This will help them avoid being stuck with a security or asset that is no longer viable or serves their goals. 

Closing Bell

The secondary stock market has enabled private investors to participate in the long-term development of a country’s economy. With such robust functions, it is hardly surprising that the secondary capital market has become the central driving force behind a country’s economic development.

So while the secondary stock market has allowed for several interesting opportunities to come into being, there is always one thing that remains constant. That is the need to do proper research. It is now possible to buy and sell financially binding assets that can cause some gain or loss to your portfolio. Hence, the need for research is something one cannot expect to be replaced by the detailed functions of the secondary market. 

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