Secondary market
Encyclopedia
The page applies to the finanical term; For the merchandising concept, see Aftermarket (merchandise).
The secondary market, also called aftermarket, is the financial market where previously issued securities and financial instruments
such as stock
, bonds
, options
, and futures
are bought and sold.http://www.businessdictionary.com/definition/secondary-market.html. Another frequent usage of "secondary market" is to refer to loans which are sold by a mortgage bank
to investors such as Fannie Mae and Freddie Mac.
The term "secondary market" is also used to refer to the market for any used goods
or assets, or an alternative use for an existing product or asset where the customer base is the second market (for example, corn has been traditionally used primarily for food production and feedstock, but a "second" or "third" market has developed for use in ethanol production).
With primary issuances of securities or financial instruments, or the primary market
, investors purchase these securities directly from issuers such as corporations issuing shares in an IPO or private placement
, or directly from the federal government in the case of treasuries. After the initial issuance, investors can purchase from other investors in the secondary market.
The secondary market for a variety of assets can vary from loans to stocks, from fragmented to centralized, and from illiquid
to very liquid. The major stock exchanges are the most visible example of liquid secondary markets - in this case, for stocks of publicly traded companies. Exchanges such as the New York Stock Exchange
, Nasdaq
and the American Stock Exchange
provide a centralized, liquid secondary market for the investors who own stocks that trade on those exchanges. Most bonds and structured products trade “over the counter,” or by phoning the bond desk of one’s broker-dealer. Loans sometimes trade online using a Loan Exchange.
or speculator
to another. It is therefore important that the secondary market be highly liquid
(originally, the only way to create this liquidity was for investors and speculators to meet at a fixed place regularly; this is how stock exchange
s originated, see History of the Stock Exchange). As a general rule, the greater the number of investors that participate in a given marketplace, and the greater the centralization of that marketplace, the more liquid the market.
Fundamentally, secondary markets mesh the investor's preference for liquidity (i.e., the investor's desire not to tie up his or her money for a long period of time, in case the investor needs it to deal with unforeseen circumstances) with the capital user's preference to be able to use the capital for an extended period of time.
Accurate share price allocates scarce capital more efficiently when new projects are financed through a new primary market offering, but accuracy may also matter in the secondary market because: 1) price accuracy can reduce the agency costs of management, and make hostile takeover a less risky proposition and thus move capital into the hands of better managers, and 2) accurate share price aids the efficient allocation of debt finance whether debt offerings or institutional borrowing.
such as patents, or rights to musical compositions, is considered a secondary market because it allows the owner to freely resell property entitlements issued by the government. Similarly, secondary markets can be said to exist in some real estate
contexts as well (e.g. ownership shares of time-share vacation homes are bought and sold outside of the official exchange set up by the time-share issuers). These have very similar functions as secondary stock and bond markets in allowing for speculation, providing liquidity, and financing through securitization.1) to facilitate liquidity marketability of long term instrument. 2)to provide instant valuation of securities caused by changes in the enivironment.
of 2002, private secondary markets began to emerge. These markets are generally only available to institutional
or accredited investor
s and allow trading of unregistered and private company securities.
In private equity
, the secondary market
(also often called private equity secondaries
or secondaries
) refers to the buying and selling of pre-existing investor commitments to private equity fund
s. Sellers of private equity investments sell not only the investments in the fund but also their remaining unfunded commitments to the funds.
The secondary market, also called aftermarket, is the financial market where previously issued securities and financial instruments
Financial instruments
A financial instrument is a tradable asset of any kind, either cash; evidence of an ownership interest in an entity; or a contractual right to receive, or deliver, cash or another financial instrument....
such as stock
Stock
The capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...
, bonds
Bond (finance)
In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...
, options
Option (finance)
In finance, an option is a derivative financial instrument that specifies a contract between two parties for a future transaction on an asset at a reference price. The buyer of the option gains the right, but not the obligation, to engage in that transaction, while the seller incurs the...
, and futures
Futures contract
In finance, a futures contract is a standardized contract between two parties to exchange a specified asset of standardized quantity and quality for a price agreed today with delivery occurring at a specified future date, the delivery date. The contracts are traded on a futures exchange...
are bought and sold.http://www.businessdictionary.com/definition/secondary-market.html. Another frequent usage of "secondary market" is to refer to loans which are sold by a mortgage bank
Mortgage bank
A Mortgage bank specializes in originating and/or servicing mortgage loans.A mortgage bank is a state-licensed banking entity that makes mortgage loans directly to consumers...
to investors such as Fannie Mae and Freddie Mac.
The term "secondary market" is also used to refer to the market for any used goods
Used goods
A second-hand or used good is one that is being purchased by or otherwise transferred to a second or later end user. A used good can also simply mean it is no longer in the same condition as it was when it was first transferred to the current end user...
or assets, or an alternative use for an existing product or asset where the customer base is the second market (for example, corn has been traditionally used primarily for food production and feedstock, but a "second" or "third" market has developed for use in ethanol production).
With primary issuances of securities or financial instruments, or the primary market
Primary market
The primary market is that part of the capital markets that deals with the issuance of new securities. Companies, governments or public sector institutions can obtain funding through the sale of a new stock or bond issue. This is typically done through a syndicate of securities dealers. The process...
, investors purchase these securities directly from issuers such as corporations issuing shares in an IPO or private placement
Private placement
Private placement is a funding round of securities which are sold without an initial public offering, usually to a small number of chosen private investors...
, or directly from the federal government in the case of treasuries. After the initial issuance, investors can purchase from other investors in the secondary market.
The secondary market for a variety of assets can vary from loans to stocks, from fragmented to centralized, and from illiquid
Market liquidity
In business, economics or investment, market liquidity is an asset's ability to be sold without causing a significant movement in the price and with minimum loss of value...
to very liquid. The major stock exchanges are the most visible example of liquid secondary markets - in this case, for stocks of publicly traded companies. Exchanges such as the New York Stock Exchange
New York Stock Exchange
The New York Stock Exchange is a stock exchange located at 11 Wall Street in Lower Manhattan, New York City, USA. It is by far the world's largest stock exchange by market capitalization of its listed companies at 13.39 trillion as of Dec 2010...
, Nasdaq
NASDAQ
The NASDAQ Stock Market, also known as the NASDAQ, is an American stock exchange. "NASDAQ" originally stood for "National Association of Securities Dealers Automated Quotations". It is the second-largest stock exchange by market capitalization in the world, after the New York Stock Exchange. As of...
and the American Stock Exchange
American Stock Exchange
NYSE Amex Equities, formerly known as the American Stock Exchange is an American stock exchange situated in New York. AMEX was a mutual organization, owned by its members. Until 1953, it was known as the New York Curb Exchange. On January 17, 2008, NYSE Euronext announced it would acquire the...
provide a centralized, liquid secondary market for the investors who own stocks that trade on those exchanges. Most bonds and structured products trade “over the counter,” or by phoning the bond desk of one’s broker-dealer. Loans sometimes trade online using a Loan Exchange.
Function
Secondary marketing is vital to an efficient and modern capital market. In the secondary market, securities are sold by and transferred from one investorInvestor
An investor is a party that makes an investment into one or more categories of assets --- equity, debt securities, real estate, currency, commodity, derivatives such as put and call options, etc...
or speculator
Speculation
In finance, speculation is a financial action that does not promise safety of the initial investment along with the return on the principal sum...
to another. It is therefore important that the secondary market be highly liquid
Market liquidity
In business, economics or investment, market liquidity is an asset's ability to be sold without causing a significant movement in the price and with minimum loss of value...
(originally, the only way to create this liquidity was for investors and speculators to meet at a fixed place regularly; this is how stock exchange
Stock exchange
A stock exchange is an entity that provides services for stock brokers and traders to trade stocks, bonds, and other securities. Stock exchanges also provide facilities for issue and redemption of securities and other financial instruments, and capital events including the payment of income and...
s originated, see History of the Stock Exchange). As a general rule, the greater the number of investors that participate in a given marketplace, and the greater the centralization of that marketplace, the more liquid the market.
Fundamentally, secondary markets mesh the investor's preference for liquidity (i.e., the investor's desire not to tie up his or her money for a long period of time, in case the investor needs it to deal with unforeseen circumstances) with the capital user's preference to be able to use the capital for an extended period of time.
Accurate share price allocates scarce capital more efficiently when new projects are financed through a new primary market offering, but accuracy may also matter in the secondary market because: 1) price accuracy can reduce the agency costs of management, and make hostile takeover a less risky proposition and thus move capital into the hands of better managers, and 2) accurate share price aids the efficient allocation of debt finance whether debt offerings or institutional borrowing.
Related usage
The term may refer to markets in things of value other than securities. For example, the ability to buy and sell intellectual propertyIntellectual property
Intellectual property is a term referring to a number of distinct types of creations of the mind for which a set of exclusive rights are recognized—and the corresponding fields of law...
such as patents, or rights to musical compositions, is considered a secondary market because it allows the owner to freely resell property entitlements issued by the government. Similarly, secondary markets can be said to exist in some real estate
Real estate
In general use, esp. North American, 'real estate' is taken to mean "Property consisting of land and the buildings on it, along with its natural resources such as crops, minerals, or water; immovable property of this nature; an interest vested in this; an item of real property; buildings or...
contexts as well (e.g. ownership shares of time-share vacation homes are bought and sold outside of the official exchange set up by the time-share issuers). These have very similar functions as secondary stock and bond markets in allowing for speculation, providing liquidity, and financing through securitization.1) to facilitate liquidity marketability of long term instrument. 2)to provide instant valuation of securities caused by changes in the enivironment.
Private Secondary Markets
Partially due to increased compliance and reporting obligations enacted in the Sarbanes-Oxley ActSarbanes-Oxley Act
The Sarbanes–Oxley Act of 2002 , also known as the 'Public Company Accounting Reform and Investor Protection Act' and 'Corporate and Auditing Accountability and Responsibility Act' and commonly called Sarbanes–Oxley, Sarbox or SOX, is a United States federal law enacted on July 30, 2002, which...
of 2002, private secondary markets began to emerge. These markets are generally only available to institutional
Institutional investor
Institutional investors are organizations which pool large sums of money and invest those sums in securities, real property and other investment assets...
or accredited investor
Accredited investor
Accredited investor is a term defined by various securities laws that delineates investors permitted to invest in certain types of higher risk investments including seed money, limited partnerships, hedge funds, and angel investor networks...
s and allow trading of unregistered and private company securities.
In private equity
Private equity
Private equity, in finance, is an asset class consisting of equity securities in operating companies that are not publicly traded on a stock exchange....
, the secondary market
Private equity secondary market
In finance, the private equity secondary market refers to the buying and selling of pre-existing investor commitments to private equity and other alternative investment funds....
(also often called private equity secondaries
Private equity secondary market
In finance, the private equity secondary market refers to the buying and selling of pre-existing investor commitments to private equity and other alternative investment funds....
or secondaries
Private equity secondary market
In finance, the private equity secondary market refers to the buying and selling of pre-existing investor commitments to private equity and other alternative investment funds....
) refers to the buying and selling of pre-existing investor commitments to private equity fund
Private equity fund
A private equity fund is a collective investment scheme used for making investments in various equity securities according to one of the investment strategies associated with private equity....
s. Sellers of private equity investments sell not only the investments in the fund but also their remaining unfunded commitments to the funds.
See also
- Aftermarket (automotive)Aftermarket (automotive)The automotive aftermarket is the secondary market of the automotive industry, concerned with the manufacturing, remanufacturing, distribution, retailing, and installation of all vehicle parts, chemicals, tools, equipment and accessories for light and heavy vehicles, after the sale of the...
- Clean Energy BankClean Energy BankClean Energy Bank , also called Clean Energy Investment Bank, is a proposed federal government corporation of the United States to assist in the financing, and facilitate the commercial use, of renewable energy and energy efficiency technologies within the United States.The CEB could be created...
- Grey marketGrey marketA grey market or gray market also known as parallel market is the trade of a commodity through distribution channels which, while legal, are unofficial, unauthorized, or unintended by the original manufacturer...
- Primary marketPrimary marketThe primary market is that part of the capital markets that deals with the issuance of new securities. Companies, governments or public sector institutions can obtain funding through the sale of a new stock or bond issue. This is typically done through a syndicate of securities dealers. The process...
- Third market
- Fourth marketFourth marketFourth market trading is direct institution-to-institution trading without using the service of broker-dealers. It is impossible to estimate the volume of fourth market activity because trades are not subject to reporting requirements. Studies have suggested that several million shares are traded...
- Private equity secondary marketPrivate equity secondary marketIn finance, the private equity secondary market refers to the buying and selling of pre-existing investor commitments to private equity and other alternative investment funds....
- ResellerResellerA reseller is a company or individual that purchases goods or services with the intention of reselling them rather than consuming or using them. This is usually done for profit...