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What Is the Secondary Market? How Does It Work?

The word “market” is common enough. However, if you have come across the words “secondary market”, you may wonder what this is. Have you ever asked yourself, “What is the secondary market”? This is a very simple question to answer, and if you are an investor, you should know certain concepts. The familiar exchanges on which stocks and other securities are traded are secondary markets. 

What is the Secondary Market

Do you want to open a demat account? You may be thinking of the risky, yet rewarding,  investment in the stock market. The secondary market, essentially, is the place where investors and traders purchase and sell any securities. In India, both the national exchanges, the National Stock Exchange (NSE), and the Bombay Stock Exchange (BSE), are secondary markets. To give more perspective on secondary markets, the New York Stock Exchange (NYSE) and the NASDAQ of the USA comprise secondary markets. 

Understanding Secondary Markets

Transactions and trading that occur on the secondary market are called “secondary” only because they tend to be a step away from transactions that initially created the securities, to begin with. For instance, say an upcoming IPO is due. It gets created on the primary market. Once its shares are allotted to investors after the IPO is launched, the company goes public, and its shares are listed on the exchange (the primary market), and then they can be bought or sold in secondary transactions. This may answer the question, “What is the secondary market?”, but how does it work? To understand this, if you haven’t already gauged it, UPI should be clear about both primary and secondary markets. 

How the Secondary Markets Work

It is not rational to separate the primary market from the secondary market as both are connected in an important way. You should start your understanding of the two concepts with a simple distinction: In the secondary market, investors and traders invest and trade with one another, rather than with an issuing authority, as is done in the primary market. 

So, when you ask, “What is the secondary market, and how does it work?”, this is the way to explain the answer to you: When any company issues bonds or stocks for the very first time, and sells these to investors directly, these transactions occur on the primary market. The most frequent and common transactions made on primary markets are initial public offerings or IPOs. Here, what is the primary market activity? It is the transaction that occurs between the investor purchasing a lot of shares and the investment bank, which is the underwriter of the IPO. All the proceeds that are generated by the IPO goes to the company’s investors (the original ones who may have started the company). In case these original investors wish to sell their stock in the company after an IPO is launched and the company becomes a publicly traded one, they can sell stakes in the secondary market. The proceeds of this stock sold go back to the investor selling it, not to the company that issued the IPO. 

Knowing the Difference

While you open a Demat account to invest in the stock markets (secondary markets), any upcoming IPO subscription means that you are making a transaction in the primary market. Furthermore, it is important to note that market prices in the primary market are fixed in advance. On the other hand, the prices in the secondary market are determined by many factors, like sentiments of investors and traders and the forces of supply and demand, besides other key variables. The one thing to remember about the secondary market is that when investors trade in secondary markets, transactions take place after any assets have been issued at primary markets. 

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