The securities market includes both the money market and the capital market. Most investors turn to the capital market whereas the transactions involve the long-term securities or those with maturities greater than a year. Capital market can be further classified as either primary or secondary financial market. Primary financial market is where new issues such as stocks, bonds, and other long-term securities are sold to the public. Meanwhile, securities and claims that have already been issued are traded and sold in the secondary financial market.
Secondary financial market is one of the most preferred by investors and used by people to create and maintain wealth and earnings. Here is a closer look at some of the features of the secondary financial market.
What is Secondary Financial Market?
Known as aftermarket, the secondary financial market provides a way for investors to sold securities that are already issued to other investors.
What is its difference from primary market?
The primary market goes public first through the Initial Public Offering or IPO, rights offering, and private placement. The issuer of securities or the company receives the earnings of sales. Unlike the primary market, the transactions in the secondary financial market don’t involve the corporation or company that issued the securities. The seller exchanges and trades securities for money or cash paid by the buyer.
How important is the secondary financial market?
The secondary financial market provides liquidity to security investors or purchasers. Liquidity is the ease with which an asset- such as stocks, bonds, and other securities can be exchanged for goods and services. It increases liquidity as investors can purchase long- term financial securities and resell it to other investors if the need for liquidity arises.
The secondary financial market also offers the investors a continuous pricing of securities. The price signals of traded instruments reflect value at each point in time, thus providing important information.
It also allows the investors to diversify risks because they have greater choice in buying portfolios or collection of assets that are well diversified.
How do transactions in the secondary financial market works?
The secondary financial markets are traded on either an Organized Exchange or Over-the-Counter (OTC).
Organized Exchanges are centralized institutions that act as auction markets wherein the transactions are through buy and sell orders. The flow of supply and demand among securities determines its price. The best known exchanges for stock are New York Stock Exchange (NYSE) which has the strictest listing policies, and the American Exchange (AMEX) which is the major market for Exchange Traded Funds. Other exchanges include the options exchanges that allow trading of options, and future exchanges for transactions on financial futures.
On the other hand, Over-the-Counter (OTC) transactions are another way of trading in which transactions are made in both IPO and outstanding securities. The dealers in the OTC stand ready to make a market and those multiple of market makers set bid and ask prices for any given securities. The electronic network connects the OTC dealers with buyers and sellers. The first and best known electronic network for security trading is called the National Association of Securities Dealers Automated Quotations (NASDAQ). It enables the buyers and sellers to locate one another easily.