Security Market Operations

Meaning and Features of Secondary Market

A market place where securities are directly purchased from the issuer is called primary market. Securities ( especially equity shares ) once sold by the issuer ( s ) are not redeemed by them but can be liquidated by selling to some other trader. Hence, a market place where already purchased securities are traded is known as ” Secondary Market ”.

In this market, supply and demand interaction determines the selling price of a security. No country can imagine the successful functioning of its capital market in the absence of secondary market. This is a marketplace which motivates traders to buy securities in the primary market as securities once purchased from the issuer can easily be sold in the secondary market.

Features of Secondary Market

(1) Liquidity – Secondary market is platform where traders ( i.e. buyers and sellers ) encash their investments by dealing in already owned securities.

(2) Intermediary – Buyers and sellers in the secondary market do not meet in person but deal through a mediator i.e. stock exchange. This mediator among the traders is called intermediary.

(3) Anonymity – Since buyers and sellers deal through an intermediary, they always remain unknown to each other.

(4) Auction Market – It is called an auction market because buyers and sellers mention the price and quantity at which they are willing to buy or sell an underlying security. An order gets executed only if price and quantity mentioned by the buyer and seller matches.

(5) Transaction Cost – Trading in secondary is not free of cost. Buyers and sellers have to pay commission for their trades.

(6) Price Determination – Secondary market determines the price of a security only through demand and supply interaction. Trader’s reaction towards new information mobilizes demand / supply curve and generates selling price accordingly.

(7) Transparency – Secondary market is completely transparent as you can acquire trading related information such as no. of buyers and sellers for a particular stock, total amount of trading ( volume ) in a particular day / month / year, current and the previous prices of securities, securities life time high or low price etc.

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Sarvesh Arora

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