A secondary market is where investors have a chance to sell or buy securities after they are issued at the primary market. It is a platform for investors to trade instruments among fellow investors, which leads to price discovery and facilitates liquidity. The secondary market also provides opportunities for investors to alter their portfolios in any way, contribute to the capital markets, and have an exit strategy. Discover more about the types of secondary markets, the instruments found there, and their functions in the following sections.
Types of Secondary Markets
The following are the two types of secondary markets that investors can explore:
Over-the-Counter Market
The over-the-counter market is where the stock exchange does not get involved. Investors trade with their shares without any regulatory authority to change any process. This can be both an advantage and a risk since no standardisation of share prices leads to every investor having their unique terms.
The Stock Exchange
Stock exchanges are where most of the investors go to trade their securities. The Bombay Stock Exchange and the National Stock Exchange are some of the best examples of secondary markets. These have strict regulations concerning market securities and have some of the lowest risks. But it also leads to higher transaction costs, fees, and commissions.
Instruments Found in the Secondary Market
The following are the financial instruments found in the secondary market.
Hybrid Instruments
Hybrid instruments are made by including a combination of two or more different instruments. Corporations make them available to investors as debt securities or loans that can later be altered into equity after some time.
Variable Income Instruments
The variable income instruments are those that are without a fixed rate of return. These instruments have fluctuating values, and their possible return is based on various market factors. At the same time, they have an incredibly high return potential along with a high risk. So, some of the common types of variable income instruments include mutual funds, equities, and derivatives.
Fixed Income Instruments
These are debt instruments that will regularly pay interest to the investors. The fixed income instruments come with the assurance that the principal or the initial investment amount will be returned. Some of the common examples of these instruments include preference shares, debentures, and bonds.
Pros of the Secondary Market
The following are some of the benefits of investing through the secondary market:
- Accessibility: One can get a wide range of securities through the secondary market, so it provides a diverse investment landscape.
- Price Discovery: The secondary market allows constant communication between buyers and sellers, which helps provide fair market prices to all investors.
- Liquidity: The secondary market provides a lot of liquidity, which helps with selling or buying the securities seamlessly.
Wrapping Up!
The secondary market is a great way for investors to sell and buy a wide variety of securities. The demand and supply of the instruments determine the prices in this market. The price is higher with a rise in demand, whereas the price is low with a reduced supply. Such a mechanism helps with efficient pricing while ensuring that the investors get good value on the instruments.
FAQs
1. Is it better to invest through the primary market or the secondary?
Both the primary and the secondary market have their benefits. One has instruments directly from government institutes and companies, whereas another has securities from fellow investors. Both platforms have different dynamics, and they are suitable for different needs. So, whether one is better than the other or not depends on what the investor is looking for.
2. Are there any limitations to investing in a secondary market?
Yes, the secondary market has its own set of limitations, and some of them include counterparty risk, market manipulation, volatility, etc. This market does not operate under any regulation, and it is controlled solely by other investors.
3. What are some of the secondary market transactions?
Some examples of secondary market transactions include bond trading, stock trading, options trading, mutual funds investment, futures contract trading, etc.
