The secondary market, also called the aftermarket and follow on public offering, is the financial market
in which previously issued financial instruments
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 compan ...
, and futures
are bought and sold. The initial sale of the security
by the issuer to a purchaser, who pays proceeds to the issuer, is the primary market
. 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
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
s (the primary market), often an underwriter
purchases these securities directly from issuers
, such as corporation
s issuing shares
in an IPO
or private placement
. 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
The secondary market can be for a variety of assets, that can vary from stocks to loans, from fragmented to centralized, and from illiquid
to very liquid.
The major stock exchange
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
New York, often called New York City or NYC, is the most ...
, London Stock Exchange
, and Nasdaq Stock Market
provide centralized, liquid secondary markets for investors who wish to buy or sell stocks that trade on those exchanges. Most bonds and structured product
s trade " over the counter
", or by phoning the bond desk of one’s broker-dealer
. 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
to investors such as Fannie Mae
and Freddie Mac
. The term "secondary market" is also used to refer to the market for any used goods
In 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 of ownership that c ...
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).
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
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 ...
(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
a less risky proposition and thus move capital
into the hands of better managers; and 2) accurate share price aids the efficient allocation of debt finance whether debt offerings or institutional borrowing.
The term may refer to markets in things of value other than securities. For example, the ability to buy and sell intellectual property
such as patents
, 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
contexts as well (''e.g.'', ownership shares of time-share
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
. 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
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
and management and public accounting firm
s enacted in the Sarbanes–Oxley Act
of 2002, private secondary markets began to emerge, such as SecondMarket
and SecondaryLink. These markets are generally only available to institutional
or accredited investor
s, and allow trading of unregistered and private company securities.
* Aftermarket (automotive)
* Grey market
* Primary market
* Third market
* Fourth market
* Original equipment manufacturer