Definition: Secondary market, colloquially known as the stock market is the market which provides a platform to the investors to trade in initially issued securities.
This means that the securities, such as shares, bonds, debentures, futures, options, etc. are originally issued by the Corporates, Central and State government, and public bodies, in the primary market to the public, through IPO (Initial Public Offer). After that, the stock is listed and traded in the secondary market among the investors. For this very reason, it is referred to as Aftermarket.
As the trading is performed among the investors, the sale proceeds go to the investors rather than the issuer company. It is a marketplace where securities are traded with a considerable degree of security, liquidity and transparency regularly without any difficulty or delay.
What is a Stock Broking?
Stock Brokers are the members of the exchange who acts as a link to facilitate the transaction of retail and institutional investors, and the service provided by them is called Stock Broking. A certain amount is charged by the stockbroking firms as a commission or fee for the service provided, called Brokerage.
Stockbrokers belong to brokerage firms, who trades stocks both on the exchange and OTC (over the counter), wherever they get the best price and liquidity for the securities.
The stockbrokers need to be registered with the exchange board, to start their operations, that is why they are also called as shareholder’s registered representative or trading representative.
Further, they need to adhere to the recommended code of conduct to perform the transaction. The brokers get into the transaction, either on their own account or on behalf of their clients, i.e. investors.
Functions of Secondary Market
- Growth of primary market: Secondary Market assists in the growth of the primary market by providing a ready market to the investors, i.e. mutual funds, financial institutions and other investors, a ready and continuous market for their securities.
- Economic Indicator: Whenever there is a change in government or its policies or any international event, it ultimately affects the secondary market. This is due to the fact the secondary market is highly sensitive to the changing conditions of the economy as a whole.
Hence, when the secondary market is performing good, it is a sign of a stable economic condition of the country.
- Price determination: In the secondary market, the price of the securities depends on its demand and supply. So, companies with high growth prospects and earning good profits, obviously have a high demand in the market. That is why the price of shares of such companies will be high comparatively.
- Safety of Transactions: As the trading is performed through a highly encrypted electronic system amongst its members with a high degree of transparency and within the framework of rules and regulations of the exchange board, makes it completely secure and safe.
Furthermore, it allows the purchase and sale of only those securities which are listed with the exchange and for the purpose of listing, the exchange itself confirms the soundness and genuineness of the company whose securities are being listed.
- Mobilization of funds: It participates in the economic growth of the country by allocating the funds of the investors in the most productive and profitable sector, i.e. industrial and commercial establishments, which facilitates the mobilization of savings for investments, resulting in capital formation.
To wrap up the discussion, we can say that the secondary market is the lifeblood of the entire economy, which reflects the economic trends and offers free marketability and negotiability of securities.
Secondary Market keeps full record of the transactions that take place in various financial instruments regularly and provides complete information on its prices and sales volume on a continuous basis to the media, to ensure quick and rational decision making on purchase and sale of securities to the investors, and also to keep them updated about the current market price of their holdings.
Moreover, it also guides and educates the people who are willing to invest, on where, when and how to invest their funds, to get better returns.