Secondary market: Difference between revisions
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{{Short description|Market in issued financial instruments}} |
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{{About|the financial term|the merchandising concept|Aftermarket (merchandise)}} |
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{{Financial markets}} |
{{Financial markets}} |
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The '''secondary market''', also called the '''aftermarket''' and '''follow on public offering''', is the [[financial markets|financial market]] in which previously issued [[financial instruments]] such as [[stock]], [[Bond (finance)|bonds]], [[option (finance)|options]], and [[Futures contract|futures]] are bought and sold.<ref>{{ |
The '''secondary market''', also called the '''aftermarket''' and '''follow on public offering''', is the [[financial markets|financial market]] in which previously issued [[financial instruments]] such as [[share capital|stock]], [[Bond (finance)|bonds]], [[option (finance)|options]], and [[Futures contract|futures]] are bought and sold. The initial sale of the [[Security (finance)|security]] by the issuer to a purchaser, who pays proceeds to the issuer, is the [[primary market]].<ref>{{Cite web|url=https://www.investor.gov/introduction-investing/investing-basics/glossary/primary-market|title=Primary Market|publisher=U.S. Securities and Exchange Commission}}</ref> All sales after the initial sale of the security are sales in the secondary market.{{cn|date=March 2024}} Whereas the term primary market refers to the market for new issues of securities, and "[a] market is primary if the proceeds of sales go to the [[issuer]] of the securities sold," the secondary market in contrast is the market created by the later trading of such securities.<ref name="autoaa">{{Cite web|url=https://www.oregonmetro.gov/sites/default/files/2018/03/08/Metro-Code-chapter-7-03-updated-03072018.pdf|title=Section 7.03.120 - Definitions; Primary Market}}</ref> |
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| ⚫ | With primary issuances of securities or [[financial instrument]]s (the primary market), often an [[underwriter]] purchases these securities directly from [[issuers]], such as [[corporation]]s issuing [[shares]] in an [[Initial public offering|IPO]] or [[private placement]]. Then the underwriter re-sells the securities to other buyers, in what is referred to as a secondary market or aftermarket (or a buyer in contrast may buy directly from the federal government, in the case of a government issuing [[United States Treasury security|treasuries]]).<ref name="auto">{{Cite news|url=https://www.investopedia.com/terms/s/secondarymarket.asp|title=Secondary Market|date=March 30, 2022|work=Investopedia|language=en-US}}</ref> |
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| ⚫ | The term "secondary market" is also used to refer to the market for any [[used goods]] or |
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| ⚫ | With primary issuances of [[ |
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[[File:New York Stock Exchange Facade 2015.jpg|thumb|200px|The [[New York Stock Exchange]]]] |
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The secondary market can be for a variety of assets, that can vary from stocks to loans, from fragmented to centralized, and from [[Market liquidity|illiquid]] to very liquid. |
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The |
The major [[stock exchange]]s 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]], [[London Stock Exchange]], and [[Nasdaq Stock Market]] provide centralized, liquid secondary markets for investors who wish to buy or sell stocks that trade on those exchanges. Most bonds and [[structured product]]s trade "[[Over-the-counter (finance)|over the counter]]", or by phoning the bond desk of one’s [[broker-dealer]]. Loans sometimes trade online, using a loan exchange.<ref>Manjula A. Soudatti (2021). [https://books.google.com/books?id=wk0-EAAAQBAJ&dq=loans+sometimes+trade+online&pg=PA24 ''Investment Management'']</ref> |
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| ⚫ | Another 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 [[asset]]s, 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).<ref>Raghu Korrapati (2014). [https://books.google.com/books?id=z4psBQAAQBAJ&dq=The+term+%22secondary+market%22+is+also+used+to+refer+to+the+market+for+any+used+goods&pg=PT278 ''Validated Management Practices'']</ref> |
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[[File:Emanuel de Witte - De binnenplaats van de beurs te Amsterdam.jpg|thumb|right|200px|Courtyard of the [[Amsterdam Stock Exchange]] ([[:nl:Beurs van Hendrick de Keyser|Beurs van Hendrick de Keyser]] in Dutch) by [[Emanuel de Witte]], 1653. With the founding of the [[Dutch East India Company]] (VOC) and the rise of Dutch [[capital market]]s in the early 1600s, the 'old' [[Exchange (organized market)|bourse]] became [[stock exchange|a formal exchange]] that specialize in creating and sustaining secondary markets in the [[Security (finance)|securities]] (such as [[corporate bond|bond]]s and [[share (finance)|share]]s of [[stock]]) issued by [[corporations]].<ref>Neal, Larry (2005). “Venture Shares of the Dutch East India Company,”, in Goetzmann & Rouwenhorst (eds.), Oxford University Press, 2005, pp. 165–175</ref><ref>[[Robert Shiller|Shiller, Robert]] (2011). ''Economics 252, Financial Markets: Lecture 4 – Portfolio Diversification and Supporting Financial Institutions (Open Yale Courses)''. [Transcript]</ref><ref>Macaulay, Catherine R. (2015). “Capitalism's renaissance? The potential of repositioning the financial 'meta-economy'”. (''Futures'', Volume 68, April 2015, p. 5–18)</ref>]] |
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| ⚫ | In the secondary market, securities are sold by and transferred from one |
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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.<ref name="auto"/> |
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| ⚫ | In the secondary market, securities are sold by and transferred from one buyer to another. It is therefore important that the secondary market be highly [[market liquidity|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 exchanges originated (see [[Stock exchange#History of the Stock Exchange|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.{{fact|date=June 2022}} |
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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.<ref>Law, Share Price Accuracy and |
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 [[Financial capital|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.<ref>Artyom Durnev et al. (2003). "Law, Share Price Accuracy and Economic Performance: The New Evidence", 102 ''MICH. L. REV.'' 331.</ref> |
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==Related usage== |
==Related usage== |
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The term may refer to markets in things of value other than securities. |
The term may refer to markets in things of value other than securities. For example, the ability to buy and sell [[intellectual property]] 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.<ref>{{cite web|url=http://www.mediainstitute.org/IPI/2012/051712.php|title=Secondary Patent Markets: A Possible Role for Startups|work=The Media Institute|author=Robert P. Merges|date=May 17, 2012}}</ref> 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 timeshare issuers). These have very similar functions as secondary stock and bond markets in allowing for speculation, providing liquidity, and financing through [[securitization]]. This facilitates liquidity and marketability of the long-term instrument. It also provides instant valuation of securities caused by changes in the environment.<ref>Bharati V. Pathak (2011). [https://books.google.com/books?id=KWw8BAAAQBAJ&dq=%22secondary+market%22+provides+instant+%22valuation%22+of+securities+caused+by+changes+in+the+environment&pg=PA186 ''The Indian Financial System; Markets, Institutions and Services.'']</ref> |
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==Private secondary markets== |
==Private secondary markets== |
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[[Private |
[[Private-equity secondary market]] 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.<ref>Ryan Cotton (2012). [https://www.harrismycfo.com/pdf/secondary-funds-benefit.pdf] "The Benefits of Secondary Funds |
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in a Private Equity Portfolio."</ref> |
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Due to the increased compliance and reporting obligations enacted in the [[ |
Due to the increased compliance and reporting obligations on U.S. public company [[boards of directors]] and management and public [[accounting firm]]s enacted in the [[Sarbanes–Oxley Act]] of 2002, private secondary markets began to emerge, such as [[SecondMarket]] and SecondaryLink. These markets are generally only available to [[Institutional investor|institutional]] or [[accredited investor]]s, and allow trading of unregistered and private company securities.{{fact|date=June 2022}} |
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==See also== |
==See also== |
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* [[Fourth market]] |
* [[Fourth market]] |
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* [[Original equipment manufacturer]] (OEM) |
* [[Original equipment manufacturer]] (OEM) |
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* [[Reseller]] |
* [[Reseller]] |
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{{colend}} |
{{colend}} |
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==References== |
==References== |
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{{Reflist}} |
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{{stock market}} |
{{stock market}} |
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{{Authority control}} |
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{{DEFAULTSORT:Secondary Market}} |
{{DEFAULTSORT:Secondary Market}} |
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Latest revision as of 18:08, 29 June 2024
The secondary market, also called the aftermarket and follow on public offering, is the financial market in which previously issued financial instruments such as stock, bonds, options, and futures are bought and sold. The initial sale of the security by the issuer to a purchaser, who pays proceeds to the issuer, is the primary market.[1] All sales after the initial sale of the security are sales in the secondary market.[citation needed] Whereas the term primary market refers to the market for new issues of securities, and "[a] market is primary if the proceeds of sales go to the issuer of the securities sold," the secondary market in contrast is the market created by the later trading of such securities.[2]
With primary issuances of securities or financial instruments (the primary market), often an underwriter purchases these securities directly from issuers, such as corporations issuing shares in an IPO or private placement. Then the underwriter re-sells the securities to other buyers, in what is referred to as a secondary market or aftermarket (or a buyer in contrast may buy directly from the federal government, in the case of a government issuing treasuries).[3]
Forms of secondary market
[edit]
The secondary market can be for a variety of assets, that can vary from stocks to loans, 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, London Stock Exchange, and Nasdaq Stock Market provide centralized, liquid secondary markets for investors who wish to buy or sell 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.[4]
Another 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).[5]
Function
[edit]
In the secondary market, securities are sold by and transferred from one buyer 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 exchanges 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.[citation needed]
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.[6]
Related usage
[edit]The term may refer to markets in things of value other than securities. For example, the ability to buy and sell intellectual property 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.[7] 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 timeshare issuers). These have very similar functions as secondary stock and bond markets in allowing for speculation, providing liquidity, and financing through securitization. This facilitates liquidity and marketability of the long-term instrument. It also provides instant valuation of securities caused by changes in the environment.[8]
Private secondary markets
[edit]Private-equity secondary market refers to the buying and selling of pre-existing investor commitments to private-equity funds. Sellers of private-equity investments sell not only the investments in the fund, but also their remaining unfunded commitments to the funds.[9]
Due to the increased compliance and reporting obligations on U.S. public company boards of directors and management and public accounting firms enacted in the Sarbanes–Oxley Act of 2002, private secondary markets began to emerge, such as SecondMarket and SecondaryLink. These markets are generally only available to institutional or accredited investors, and allow trading of unregistered and private company securities.[citation needed]
See also
[edit]References
[edit]- ^ "Primary Market". U.S. Securities and Exchange Commission.
- ^ "Section 7.03.120 - Definitions; Primary Market" (PDF).
- ^ "Secondary Market". Investopedia. March 30, 2022.
- ^ Manjula A. Soudatti (2021). Investment Management
- ^ Raghu Korrapati (2014). Validated Management Practices
- ^ Artyom Durnev et al. (2003). "Law, Share Price Accuracy and Economic Performance: The New Evidence", 102 MICH. L. REV. 331.
- ^ Robert P. Merges (May 17, 2012). "Secondary Patent Markets: A Possible Role for Startups". The Media Institute.
- ^ Bharati V. Pathak (2011). The Indian Financial System; Markets, Institutions and Services.
- ^ Ryan Cotton (2012). [1] "The Benefits of Secondary Funds in a Private Equity Portfolio."
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