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25/07/2022

Advantages and disadvantages of secondary markets

Table of Content

Introduction

Different kinds of secondary markets

Secondary Markets Advantages

Secondary Market Disadvantages

Differences between the primary and secondary markets

The Secondary Market's Purposes

To conclude

Introduction

A secondary market is where investors can buy and sell previously issued financial securities, which can include both equity and debt. Consequently, it is a financial industry in which securities are purchased from other investors rather than from the issuing corporation.

Different kinds of secondary markets 

Secondary marketplaces fall into one of two categories:

OTC or Over-The-Counter

Investors in these markets trade with each other in a decentralised environment. There is a lot of competition in these markets, which results in a wide range of prices from one vendor to the next. Because the vendor and buyer are dealing one-on-one, the risk is larger than it would be in exchange.

Exchanges

There is no direct communication between the buyers and sellers in this form of the secondary market. Heavy controls are in place to ensure the safety and security of commerce. There is virtually little danger to the other party because the exchange is an insurer. As a result of exchange fees and commission, transactions in Exchanges are more expensive.

Additionally, secondary markets can be sub-divided into the following categories:

Auction

As the name implies, secondary markets like these provide a meeting place for sellers and purchasers, who can announce the amount at which their assets will be sold or bought.

Secondary Markets Advantages

There are numerous advantages to secondary market trading, including:

  • Investors should expect to get higher returns in a shorter amount of time.

  • These markets provide a high degree of liquidity for investors because of the ease with which they may purchase and sell.

  • A smaller investment can be made in secondary markets because they don't demand a large sum of money.

  • An organization's financial health can be assessed with the use of secondary marketplaces.

Secondary Market Disadvantages

Secondary market trading has several downsides:

  • Secondary market prices are prone to wild swings, which might result in a hefty loss.

  • Due to the requirements, investors must complete while trading on secondary markets, this might take a considerable amount of time.

  • Secondary markets might be hindered by government policies as well.

  • Brokerage fees are significant because an investor must pay a commission each time he or she sells or buys the stock.

Differences between the primary and secondary markets

  • The issuing business receives all of the money from the sale of shares on the primary market. After selling securities in the secondary market, investors get their money back.

  • Small investors are frequently unable to purchase securities in the main market since the issuer offers large quantities, which need large investments. Investors, on the other hand, can purchase as many shares as they desire on the secondary market.

  • There is the primary market, the securities do not change, unlike in the stock market.

No. 

Basis

Primary Market

Secondary Market

1.

Nature of securities

The Primary market deals with new securities i.e. securities which are traded for the first time

The secondary market deals with the old securities

2.

Nature of Financing

It provides additional funds to the issuing company directly

Whereas the secondary market does not provide additional funds to the concerned company. (There is an indirectly supply of capital)

3. 

Organisational difference

The primary market is not rooted in a particular area and has no geographical existence 

The stock exchanges have physical existence and are located in a particular geographical area 

4. 

Another name

New Issue Market (NIM)

After Market

5. 

Type of purchasing 

Only once 

Multiple Times 

6. 

How many times can security be sold?

Only once

Multiple Times

7. 

Buying and selling between 

Company and investors

Investors

8. 

Intermediary 

Underwriters 

Brokers 

9. 

Price

Fixed price

Fluctuates, based on the demand and supply 

The Secondary Market's Purposes

The secondary markets serve the following purposes:

The Barometer of the Economy

The secondary market serves as an excellent gauge of a country's overall economic health. To put it another way, every significant change in the country has an impact on share prices. During economic cycles, every increase or fall corresponds to a corresponding uptick or downtick. It's possible to think of the Secondary Market as a way to check on the general well-being of the economy.

Pricing of Securities

Investors, governments, and creditors all benefit from secondary markets. Data from the secondary market might help investors estimate how much money they've put in their shares. As a result, it comes in handy when doing things like figuring out taxes or borrowing money from the bank. As a result, the government has a better understanding of the financial situation of its residents. It aids in tax revenue collection. The government uses data instead of reacting to pending tax payments. To determine a borrower's creditworthiness, lenders use valuations.

Security of Transactions

Because they only deal in recognised securities, secondary markets are excellent places for traders to conduct business. The worth of a firm is checked by the stock market before it is included in the list of tradeable companies. Regulatory organisations keep a close eye on this option, making it safer than the alternatives. They ensure that regulations, such as those governing financial reporting standards, are adhered to by corporations. As a result, investors may rest assured knowing they are making a sound investment decision.

The Economic Benefits of Investing

For firms and investors having excess capital, the secondary market can be a helpful venue for them to use. Selling certain stocks and reinvesting the proceeds in new ones is an effective way to maximise your profits. As a result, investing your money effectively can help you get the best return on your money. In addition to promoting resource efficiency and lowering economic uncertainty, the movement of investment capital through disinvestment and reinvestment is essential. It promotes expansion inside specific industries as well as across entire sectors. As a result, it has a positive impact on the overall economy.

Liquidity

To facilitate the sale of securities and the subsequent transfer of value, the marketplace for securities was established. Because you can easily convert long-term capital back into a short-term one, it's useful for both short-term liquidity and medium-term investments.

To conclude

In the capital market, a corporation can raise funds by issuing securities such as stocks, bonds, debentures and Peer to peer Lending. To put it another way, primary and secondary markets are two different types of markets that deal with the creation of new securities. The above post will teach you about secondary markets as well as how they might aid you in achieving your financial objectives. It is worth noting that secondary markets also have a significant role in Peer to Peer lending. P2P platforms such as Mintos, Estateguru and others have introduced this feature to increase liquidity for investors.