What is Secondary Market and its Types? | Espresso

What Is the Secondary Market?

A secondary market is a platform where the shares of a company are traded among its investors. It is also referred to as the “market” wherein financial instruments such as bonds, stocks, options, and futures were traded previously. Therefore, a secondary market essentially means that investors can freely sell and buy shares without any intervention from the company that issued the shares.

Published on 03 March 2023

Secondary Market Meaning

Unlike the primary market, where investors buy and sell stocks, the secondary market is where investors are involved in buying and selling securities that they already own when the stocks are sold on the primary market when they are issued for the first time.

Although stocks are the most commonly traded securities, other financial instruments, such as mutual funds and bonds, are also traded on the secondary market by investment banks, individuals, and corporations.

So, the next time someone asks you, "What is secondary market?" Simply put, it is the market in which stocks and other financial instruments are traded, and it is referred to as a secondary market because the first step from the initial transaction is eliminated.

However, it is essential to note that the issuing company never participates in income generation, and their shared valuation is instead based on the performance of the market.

Thus, income is generated via the sale of shares from one investor to another.

Types of Secondary Market

There are two types of secondary markets: stock exchanges and over-the-counter markets. Let's discuss both these secondary markets in detail

●       Stock Exchange

These are centralized platforms where security trading takes place without any contact between buyers and sellers. Examples of secondary markets are the BSE (Bombay Stock Exchange) and NSE (National Stock Exchange).

Transactions taking place on stock exchanges are subject to stringent rules and regulations in securities trading. A stock exchange acts as a guarantor, and counterparty risk is almost nil or non-existent. A higher transaction cost ensures a safety net in the form of exchange fees and commissions.

●       OTC market, Over-the-counter Market

Investors who trade among themselves trade on these decentralized markets. There is fierce competition in these markets to get high volume, leading to differences in price between sellers. Also, counterparty risk is higher in these transactions due to their one-on-one nature. An example of this market is the FOREX (Foreign Exchange Market).

Apart from these two, other secondary market types include dealer and auction markets.

An auction market is essentially a platform for buyers and sellers to reach an understanding of the rate at which securities will be traded. Information regarding pricing is displayed in the public domain, including the offer's bid price.

On the other hand, the dealer market is another type of secondary market where various dealers indicate prices for specific securities in a transaction. Bonds and Forex are traded primarily in the dealer market.

Advantages of Secondary Market

There are various advantages of the secondary market, such as

  • It helps in indicating a benchmark for the fair valuation of a company.
  • This market helps in measuring the economic conditions of a country. The rise and fall in share prices are indicative of a boom or recession in the economic cycle of the country.
  • The secondary market promotes economic growth and efficiency. Thus, the sale of security involves sellers who value securities less than the price. The buyer values security more than price.
  • Investors can very conveniently ease their liquidity problem in a secondary market. A considerable number of buyers are present in this market.
  • The funds of investors remain safer due to stringent regulations governing the secondary market. The heavy regulations are a result of the market being a source of liquidity and capital formation for both the investor and the company.
  • Investors can enter into transactions among themselves to sell or purchase securities, and the prices vary depending on the demand and supply chain of the traded securities.
  • Mobilizing savings becomes reasonably easy as investors' money is held in the form of securities.


Rather than trading directly with an issuer, as in the primary market, in secondary markets, the investors trade in the market itself. When you trade on the secondary market, transactions occur after the assets have been issued on the primary market.

Investors exchange with each other in the secondary market rather than exchanging with the issuing entity. Secondary markets drive the security prices toward their actual value.

Additionally, when discussing the secondary market, the mortgage market is an excellent example to use, as it is a security commonly traded on a secondary market.

Therefore, continuous trading in the secondary market facilitates stock trading and enables the conversion of securities into cash. Investors, thus, are encouraged to undertake investments available in secondary markets for corpus creation.

However, investments in secondary markets are subject to risks due to the presence of multiple external factors. The existing valuation may also alter within a span of a few minutes or seconds.

Chandresh Khona
Team Espresso

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