how the secondary market works
as noted above securities are bought and sold by investors among one another on the secondary market after they are first sold on the primary market as such most people call the secondary market the stock market transactions that occur on the secondary market are termed secondary simply because they are one step removed from the transaction that originally created the securities in question for example a financial institution writes a mortgage for a consumer creating the mortgage security the bank can then sell it to fannie mae on the secondary market in a secondary transaction though stocks are one of the most commonly traded securities there are also other types of secondary markets for example investment banks and corporate and individual investors buy and sell mutual funds and bonds on secondary markets entities such as fannie mae and freddie mac also purchase mortgages on a secondary market 1secondary markets are important for several reasons first they provide liquidity to investors having a centralized location allows trades to take place with a large number of traders while ensuring that the value of securities isn t lost as investors buy and sell securities it also gives small traders a chance to participate in the market types of secondary marketsthe stock market is made up of centralized exchanges that allow buyers and sellers to come together to trade stocks and other assets there is no contact that takes place between each party physical or otherwise most trading takes place electronically traders must abide by the rules and regulations set forth by the appropriate regulatory bodies such as the securities and exchange commission sec in the united states examples of stock markets or secondary markets include the nyse and nasdaq in the u s as well as the london stock exchange lse the hong kong stock exchange the bombay stock exchange bse and the frankfurt stock exchange the over the counter otc market involves the trading of stocks bonds and other financial assets but rather than take place over a centralized exchange trades occur through broker dealer networks as such these assets aren t traded on an exchange stocks on the otc market are normally those of smaller companies that don t meet listing requirements otc markets include the the number of secondary markets that exist always increases as new financial products become available several secondary markets may exist in the case of assets such as mortgages bundles of mortgages are often repackaged into securities such as ginnie mae pools and resold to investors 4secondary market vs primary marketit is important to understand the distinction between the secondary market and the primary market when a company issues stock or bonds for the first time and sells those securities directly to investors that transaction occurs on the primary market some of the most common and well publicized primary market transactions are initial public offerings ipos during an ipo a primary market transaction occurs between the purchasing investor and the investment bank underwriting the ipo any proceeds from the sale of shares of stock on the primary market go to the company that issued the stock after accounting for the bank s administrative fees if these initial investors later decide to sell their stake in the company they can do so on the secondary market any transactions on the secondary market occur between investors and the proceeds of each sale go to the selling investor not to the company that issued the stock or to the underwriting bank primary market prices are often set beforehand while prices in the secondary market are determined by the basic forces of supply and demand if the majority of investors believe a stock will increase in value and rush to buy it the stock s price will typically rise if a company loses favor with investors or fails to post sufficient earnings its stock price declines as demand for that security dwindles 5