The secondary market, also called the aftermarket and follow on public offering, is the
financial market
A financial market is a market in which people trade financial securities and derivatives at low transaction costs. Some of the securities include stocks and bonds, raw materials and precious metals, which are known in the financial markets ...
in which previously issued
financial instruments
Financial instruments are monetary contracts between parties. They can be created, traded, modified and settled. They can be cash (currency), evidence of an ownership interest in an entity or a contractual right to receive or deliver in the form ...
such as
stock
In finance, stock (also capital stock) consists of all the shares by which ownership of a corporation or company is divided.Longman Business English Dictionary: "stock - ''especially AmE'' one of the shares into which ownership of a company ...
,
bonds,
options, and
futures
Futures may mean:
Finance
*Futures contract, a tradable financial derivatives contract
*Futures exchange, a financial market where futures contracts are traded
* ''Futures'' (magazine), an American finance magazine
Music
* ''Futures'' (album), a ...
are bought and sold. The initial sale of the
security
Security is protection from, or resilience against, potential harm (or other unwanted coercive change) caused by others, by restraining the freedom of others to act. Beneficiaries (technically referents) of security may be of persons and social ...
by the issuer to a purchaser, who pays proceeds to the issuer, is the
primary market :''"Primary market" may also refer to a market in art valuation.''
The primary market is the part of the capital market that deals with the issuance and sale of securities to purchasers directly by the issuer, with the issuer being paid the proce ...
. All sales after the initial sale of the security are sales in the secondary market. Whereas the term primary market refers to the market for new issues of securities, and "
market is primary if the proceeds of sales go to the
issuer
Issuer is a legal entity that develops, registers, and sells securities for the purpose of financing its operations.
Issuers may be governments, corporations, or investment trusts. Issuers are legally responsible for the obligations of the issu ...
of the securities sold," the secondary market in contrast is the market created by the later trading of such securities.
With primary issuances of securities or
financial instrument
Financial instruments are monetary contracts between parties. They can be created, traded, modified and settled. They can be cash (currency), evidence of an ownership interest in an entity or a contractual right to receive or deliver in the form ...
s (the primary market), often an
underwriter
Underwriting (UW) services are provided by some large financial institutions, such as banks, insurance companies and investment houses, whereby they guarantee payment in case of damage or financial loss and accept the financial risk for liabilit ...
purchases these securities directly from
issuers, such as
corporation
A corporation is an organization—usually a group of people or a company—authorized by the state to act as a single entity (a legal entity recognized by private and public law "born out of statute"; a legal person in legal context) and r ...
s issuing
shares
In financial markets, a share is a unit of equity ownership in the capital stock of a corporation, and can refer to units of mutual funds, limited partnerships, and real estate investment trusts. Share capital refers to all of the shares of an ...
in an
IPO
An initial public offering (IPO) or stock launch is a public offering in which shares of a company are sold to institutional investors and usually also to retail (individual) investors. An IPO is typically underwritten by one or more investment ...
or
private placement
Private placement (or non-public offering) is a funding round of securities which are sold not through a public offering, but rather through a private offering, mostly to a small number of chosen investors. Generally, these investors include friend ...
. Then the underwriter re-sells the securities to other buyers, in what is referred to as a secondary market or aftermarket (or a buyer in contrast may buy directly from the federal government, in the case of a government issuing
treasuries).
Forms of secondary market
![New York Stock Exchange Facade 2015](https://upload.wikimedia.org/wikipedia/commons/7/78/New_York_Stock_Exchange_Facade_2015.jpg)
The secondary market can be for a variety of assets, that can vary from stocks to loans, from fragmented to centralized, and from
illiquid
In business, economics or investment, market liquidity is a market's feature whereby an individual or firm can quickly purchase or sell an asset without causing a drastic change in the asset's price. Liquidity involves the trade-off between th ...
to very liquid.
The major
stock exchange
A stock exchange, securities exchange, or bourse is an exchange where stockbrokers and traders can buy and sell securities, such as shares of stock, bonds and other financial instruments. Stock exchanges may also provide facilities for th ...
s are the most visible example of liquid secondary markets - in this case, for stocks of publicly traded companies. Exchanges such as the
New York Stock Exchange
The New York Stock Exchange (NYSE, nicknamed "The Big Board") is an American stock exchange in the Financial District of Lower Manhattan in New York City. It is by far the world's largest stock exchange by market capitalization of its listed c ...
,
London Stock Exchange
London Stock Exchange (LSE) is a stock exchange in the City of London, England, United Kingdom. , the total market value of all companies trading on LSE was £3.9 trillion. Its current premises are situated in Paternoster Square close to St Pau ...
, and
Nasdaq Stock Market
The Nasdaq Stock Market () (National Association of Securities Dealers Automated Quotations Stock Market) is an American stock exchange based in New York City. It is the most active stock trading venue in the US by volume, and ranked second ...
provide centralized, liquid secondary markets for investors who wish to buy or sell stocks that trade on those exchanges. Most bonds and
structured product
A structured product, also known as a market-linked investment, is a pre-packaged structured finance investment strategy based on a single Security (finance), security, a basket of securities, Option (finance), options, Index (economics), indices, ...
s trade "
over the counter
Over-the-counter (OTC) drugs are medicines sold directly to a consumer without a requirement for a prescription from a healthcare professional, as opposed to prescription drugs, which may be supplied only to consumers possessing a valid prescr ...
", or by phoning the bond desk of one’s
broker-dealer
In financial services, a broker-dealer is a natural person, company or other organization that engages in the business of trading securities for its own account or on behalf of its customers. Broker-dealers are at the heart of the securities and d ...
. Loans sometimes trade online, using a loan exchange.
Another usage of "secondary market" is to refer to loans which are sold by a
mortgage bank
Mortgage bank is a bank that specializes in originating and/or servicing mortgage loans. In the United States, a mortgage bank is a state-licensed banking entity that makes mortgage loans directly to consumers. The difference between a mortgage b ...
to investors such as
Fannie Mae
The Federal National Mortgage Association (FNMA), commonly known as Fannie Mae, is a United States government-sponsored enterprise (GSE) and, since 1968, a publicly traded company. Founded in 1938 during the Great Depression as part of the N ...
and
Freddie Mac
The Federal Home Loan Mortgage Corporation (FHLMC), commonly known as Freddie Mac, is a publicly traded, government-sponsored enterprise (GSE), headquartered in Tysons Corner, Virginia.[used goods
Used goods mean any item of personal property offered for sale not as new, including metals in any form except coins that are legal tender, but excluding books, magazines, and postage stamps.
Risks
Furniture, in particular bedding or upholstere ...]
or
asset
In financial accountancy, financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value ...
s, or an alternative use for an existing product or asset where the customer base is the second market (for example, corn has been traditionally used primarily for food production and feedstock, but a "second" or "third" market has developed for use in ethanol production).
Function
![Emanuel de Witte - De binnenplaats van de beurs te Amsterdam](https://upload.wikimedia.org/wikipedia/commons/b/bf/Emanuel_de_Witte_-_De_binnenplaats_van_de_beurs_te_Amsterdam.jpg)
In the secondary market, securities are sold by and transferred from one buyer to another. It is therefore important that the secondary market be highly
liquid
A liquid is a nearly incompressible fluid that conforms to the shape of its container but retains a (nearly) constant volume independent of pressure. As such, it is one of the four fundamental states of matter (the others being solid, gas, a ...
(originally, the only way to create this liquidity was for investors and speculators to meet at a fixed place regularly; this is how stock exchanges originated (see
History of the Stock Exchange). As a general rule, the greater the number of investors that participate in a given marketplace, and the greater the centralization of that marketplace, the more liquid the market.
Accurate share price allocates scarce capital more efficiently when new projects are financed through a new primary market offering, but accuracy may also matter in the secondary market because: 1) price accuracy can reduce the agency costs of management, and make
hostile takeover
In business, a takeover is the purchase of one company (the ''target'') by another (the ''acquirer'' or ''bidder''). In the UK, the term refers to the acquisition of a public company whose shares are listed on a stock exchange, in contrast to ...
a less risky proposition and thus move
capital
Capital may refer to:
Common uses
* Capital city, a municipality of primary status
** List of national capital cities
* Capital letter, an upper-case letter Economics and social sciences
* Capital (economics), the durable produced goods used f ...
into the hands of better managers; and 2) accurate share price aids the efficient allocation of debt finance whether debt offerings or institutional borrowing.
Related usage
The term may refer to markets in things of value other than securities. For example, the ability to buy and sell
intellectual property
Intellectual property (IP) is a category of property that includes intangible creations of the human intellect. There are many types of intellectual property, and some countries recognize more than others. The best-known types are patents, cop ...
such as
patents
A patent is a type of intellectual property that gives its owner the legal right to exclude others from making, using, or selling an invention for a limited period of time in exchange for publishing an enabling disclosure of the invention."A p ...
, or rights to musical compositions, is considered a secondary market because it allows the owner to freely resell property entitlements issued by the government. Similarly, secondary markets can be said to exist in some
real estate
Real estate is property consisting of land and the buildings on it, along with its natural resources such as crops, minerals or water; immovable property of this nature; an interest vested in this (also) an item of real property, (more general ...
contexts as well (''e.g.'', ownership shares of
time-share
A timeshare (sometimes called vacation ownership) is a property with a divided form of ownership or use rights. These properties are typically resort condominium units, in which multiple parties hold rights to use the property, and each own ...
vacation homes are bought and sold outside of the official exchange set up by the timeshare issuers). These have very similar functions as secondary stock and bond markets in allowing for speculation, providing liquidity, and financing through
securitization
Securitization is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations (or other non-debt assets which generate receivables) and selling ...
. This facilitates liquidity and marketability of the long-term instrument. It also provides instant valuation of securities caused by changes in the environment.
Private secondary markets
Private-equity secondary market refers to the buying and selling of pre-existing investor commitments to
private-equity fund
A private equity fund (abbreviated as PE fund) is a collective investment scheme used for making investments in various equity (and to a lesser extent debt) securities according to one of the investment strategies associated with private equity. ...
s. Sellers of private-equity investments sell not only the investments in the fund, but also their remaining unfunded commitments to the funds.
[Ryan Cotton (2012)]
"The Benefits of Secondary Funds
in a Private Equity Portfolio."
Due to the increased compliance and reporting obligations on U.S. public company
boards of directors
A board of directors (commonly referred simply as the board) is an executive committee that jointly supervises the activities of an organization, which can be either a for-profit or a nonprofit organization such as a business, nonprofit organiz ...
and management and public
accounting firms enacted in the
Sarbanes–Oxley Act
The Sarbanes–Oxley Act of 2002 is a United States federal law that mandates certain practices in financial record keeping and reporting for corporations.
The act, (), also known as the "Public Company Accounting Reform and Investor Protecti ...
of 2002, private secondary markets began to emerge, such as
SecondMarket
Nasdaq Private Market (NPM) provides a secondary market trading venue for issuers, brokers, shareholders, and prospective investors of private company stock. Since inception, NPM has facilitated more than $40 billion in transactional volume and ha ...
and SecondaryLink. These markets are generally only available to
institutional
Institutions are humanly devised structures of rules and norms that shape and constrain individual behavior. All definitions of institutions generally entail that there is a level of persistence and continuity. Laws, rules, social conventions a ...
or
accredited investors, and allow trading of unregistered and private company securities.
See also
*
Aftermarket (automotive)
The automotive aftermarket is the secondary market of the automotive industry, concerned with the manufacturing, remanufacturing, distribution, retailing, and installation of all vehicle parts, chemicals, equipment, and accessories, ''after'' the ...
*
Grey market
A grey market or dark market (sometimes confused with the similar term " parallel market") is the trade of a commodity through distribution channels that are not authorized by the original manufacturer or trade mark proprietor. Grey market pr ...
*
Primary market :''"Primary market" may also refer to a market in art valuation.''
The primary market is the part of the capital market that deals with the issuance and sale of securities to purchasers directly by the issuer, with the issuer being paid the proce ...
*
Third market In finance, third market is the trading of exchange-listed securities in the over-the-counter (OTC) market. These trades allow institutional investors to trade blocks of securities directly, rather than through an exchange, providing liquidity a ...
*
Fourth market Fourth market trading is direct institution-to-institution trading without using the service of broker-dealers, thus avoiding both commissions, and the bid–ask spread. Trades are usually done in blocks. It is impossible to estimate the volume o ...
*
Original equipment manufacturer
An original equipment manufacturer (OEM) is generally perceived as a company that produces non-aftermarket parts and equipment that may be marketed by another manufacturer. It is a common industry term recognized and used by many professional or ...
(OEM)
*
Reseller
A reseller is a company or individual (merchant) that purchases goods or services with the intention of selling them rather than consuming or using them. This is usually done for profit (but can be done at a loss). One example can be found in the ...
References
{{DEFAULTSORT:Secondary Market
Financial markets