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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 ma ...
in which previously issued financial instruments such as stock, bonds,
options Option or Options may refer to: Computing *Option key, a key on Apple computer keyboards *Option type, a polymorphic data type in programming languages *Command-line option, an optional parameter to a command *OPTIONS, an HTTP request method ...
, 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 :''"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 proc ...
. 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 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 purchases these securities directly from
issuers 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 issue ...
, 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 ...
s issuing shares in an IPO 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 fr ...
. 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 exchanges 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 liste ...
,
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 provide centralized, liquid secondary markets for investors who wish to buy or sell stocks that trade on those exchanges. Most bonds and structured products 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 or
asset 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).


Function

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, ...
(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 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 fo ...
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, co ...
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 ...
, 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 genera ...
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 owner ...
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 funds. 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 Accounting, also known as accountancy, is the measurement, processing, and communication of financial and non financial information about economic entities such as businesses and corporations. Accounting, which has been called the "langua ...
s 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 Protect ...
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 or
accredited investor An accredited or sophisticated investor is an investor with a special status under financial regulation laws. The definition of an accredited investor (if any), and the consequences of being classified as such, vary between countries. Generally, a ...
s, 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'' t ...
* Grey market *
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 proc ...
*
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 ...
* Fourth market *
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


References

{{DEFAULTSORT:Secondary Market Financial markets