What is the Secondary Market?
The secondary market is a financial market in which investors buy and sell financial products directly from each other, rather than from the organizations and companies which issue financial instruments. The term “secondary market” or “aftermarket” is also used to refer more generally to any market in which people buy and sell goods which have been previously sold; a lively secondary market for books, for example, can be found in used bookstores all over the world.
By contrast, in a primary market, people buy products directly from the company which issues them. For example, when a company makes an initial stock offering to raise capital, investors can buy stock directly from the company. An investor could then turn around and resell the stock he or she purchased on the secondary market, pocketing the profits. Primary markets are used to raise capital, while secondary markets are used by investors to keep their assets as liquid as possible.
Secondary markets exist for a wide range of financial products, including stocks, bonds, and mortgages. One of the issues with secondary markets is that products can change hands so many times that it is difficult to track down the real owner. This can be an especially large problem with secondary markets for mortgages, which classically involve the sale of bulk packages of mortgages. Borrowers may not be sure about who owns their mortgages and where to direct payments, while mortgage holders may actually lose the physical proof that they own a mortgage note.
Stock exchanges are a well known example of a secondary market. At a stock exchange, investors trade directly with each other. Stock prices rise and fall in response to supply and demand. In this case, the value of the stocks being traded can directly influence the value of a company, but the company does not actually profit or lose from the sale of stocks. A manufacturer of widgets, for example, may find that its profits increase when it makes a new product announcement, leading to a rise in stock prices as investors grow more confident, but the sale of stocks on the secondary market does not raise capital for the manufacturer.
Primary and secondary markets are often closely related, and downturns in one can drive downturns in the other. Overall financial trends can also become problematic for either form of market, although primary and secondary markets may be influenced in different ways. The large size of such markets can also become a serious problem, as small financial issues can become magnified by panics which depress the overall value of the market.
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