Secondary Market
The secondary market is where previously issued securities are bought and sold between investors, with proceeds going to the selling investor rather than the issuing company—including stock exchanges like NYSE and NASDAQ.
Exam Tip
Secondary market = existing securities, proceeds to SELLER. Primary market = new securities, proceeds to ISSUER. Know the difference!
What is the Secondary Market?
The secondary market is where investors buy and sell securities they already own. Unlike the primary market where new securities are issued, the secondary market involves trading existing securities between investors. The issuing company receives no proceeds from these trades.
Primary vs. Secondary Market
| Feature | Primary Market | Secondary Market |
|---|---|---|
| Securities | New issues | Existing securities |
| Proceeds | To issuer | To selling investor |
| Price Setting | Underwriter | Supply and demand |
| Examples | IPO | NYSE, NASDAQ |
Major Secondary Markets
| Market Type | Examples |
|---|---|
| Stock Exchanges | NYSE, NASDAQ, Cboe |
| Bond Markets | OTC dealer markets |
| OTC Markets | OTCQX, Pink Sheets |
| Foreign Exchanges | LSE, TSE, HKEX |
Functions of Secondary Market
| Function | Benefit |
|---|---|
| Liquidity | Easy to buy/sell |
| Price Discovery | Market sets fair value |
| Continuous Trading | Real-time transactions |
| Investor Confidence | Exit strategy exists |
Order Types in Secondary Market
| Order | Description |
|---|---|
| Market Order | Execute immediately at best price |
| Limit Order | Execute at specified price or better |
| Stop Order | Trigger when price reaches level |
| Stop-Limit | Stop that becomes limit order |
Market Participants
| Participant | Role |
|---|---|
| Retail Investors | Individual buyers/sellers |
| Institutional Investors | Funds, pensions, insurance |
| Market Makers | Provide liquidity |
| Brokers | Execute customer orders |
| Specialists/DMMs | Maintain orderly markets |
Secondary Market Regulation
| Regulator | Responsibility |
|---|---|
| SEC | Overall market oversight |
| FINRA | Broker-dealer rules |
| Exchanges | Listing and trading rules |
| MSRB | Municipal securities |
Importance of Secondary Market
| Benefit | Impact |
|---|---|
| Primary Market Support | IPOs only work if resale possible |
| Economic Efficiency | Capital flows to best uses |
| Wealth Building | Investors can compound returns |
| Information | Prices reflect collective wisdom |
Study This Term In
Related Terms
Primary Market
SecuritiesThe primary market is where new securities are issued and sold for the first time, with proceeds going directly to the issuing company or government—including IPOs and new bond offerings.
Market Maker
SecuritiesA market maker is a broker-dealer firm that stands ready to buy and sell a particular security at publicly quoted prices, providing liquidity to the market by maintaining bid and ask prices throughout the trading day.
OTC Market (Over-the-Counter Market)
SecuritiesThe OTC market is a decentralized marketplace where securities are traded directly between parties through dealer networks rather than on a centralized exchange, including stocks not listed on major exchanges.
Liquidity
SecuritiesLiquidity refers to how quickly and easily an asset can be converted to cash without significantly affecting its price. Cash is the most liquid asset, while real estate and collectibles are considered illiquid.