diff --git "a/4c8a4d33-c11a-44aa-a4ce-9586c0f9c0d4.json" "b/4c8a4d33-c11a-44aa-a4ce-9586c0f9c0d4.json" new file mode 100644--- /dev/null +++ "b/4c8a4d33-c11a-44aa-a4ce-9586c0f9c0d4.json" @@ -0,0 +1,40 @@ +{ + "interaction_id": "4c8a4d33-c11a-44aa-a4ce-9586c0f9c0d4", + "search_results": [ + { + "page_name": "Primary vs. Secondary Capital Markets: What's the Difference?", + "page_url": "https://www.investopedia.com/ask/answers/012615/whats-difference-between-primary-and-secondary-capital-markets.asp", + "page_snippet": "New stocks and bonds are sold to investors In primary markets, while securities are traded by investors on the secondary market.Primary Market: Definition, Types, Examples, and Secondary \u00b7 A primary market is a market that issues new securities on an exchange, facilitated by underwriting groups and consisting of investment banks. more A primary market is a market that issues new securities on an exchange, facilitated by underwriting groups and consisting of investment banks. more \u00b7 What Is an IPO? How an Initial Public Offering Works \u00b7 An IPO is an initial public offering, in which shares of a private company are made available to the public for the first time. An IPO allows a company to raise equity capital from public investors. more \u00b7 What Is the Secondary Market? New stocks and bonds are created and sold to investors in the primary capital market, while investors trade securities on the secondary capital market. When a company publicly sells new stocks and bonds for the first time, it does so in the primary capital market. Marketing the sale to investors can often include a roadshow or dog and pony show, in which investment bankers and the company's leadership travel to meet with potential investors and convince them of the value of the security being issued. Prices are often volatile in the primary market because demand is often hard to predict when a security is first issued. That's why a lot of IPOs are set at low prices. A company can raise more equity in the primary market after entering the secondary market through a rights offering.", + "page_result": "\n\n\n\n\n\n\n\n\n\n\nUnderstanding Primary vs. Secondary Capital Markets\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n\n\n\n\n\n
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Primary vs. Secondary Capital Markets: What's the Difference?

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Thomas J Catalano is a CFP and Registered Investment Adviser with the state of South Carolina, where he launched his own financial advisory firm in 2018.\u00a0Thomas' experience gives him expertise in a variety of areas including investments, retirement, insurance, and financial planning.

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Thomas J Catalano is a CFP and Registered Investment Adviser with the state of South Carolina, where he launched his own financial advisory firm in 2018.\u00a0Thomas' experience gives him expertise in a variety of areas including investments, retirement, insurance, and financial planning.

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Primary vs. Secondary Capital Markets: An Overview

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The term capital market refers to any part of the financial system that raises capital from bonds, shares, and other investments. New stocks and bonds are created and sold to investors in the primary capital market, while investors trade securities on the secondary capital market.\n

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Primary Capital Markets

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When a company publicly sells new stocks and bonds for the first time, it does so in the primary capital market. This market is also called the new issues market. In many cases, the new issue takes the form of an initial public offering (IPO). When investors purchase securities on the primary capital market, the company that offers the securities hires an underwriting firm to review it and create a prospectus outlining the price and other details of the securities to be issued.\n

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All issues on the primary market are subject to strict regulation. Companies must file statements with the Securities and Exchange Commission (SEC) and other securities agencies and must wait until their filings are approved before they can go public. However, there is growing popularity among companies wishing to raise money in the capital markets via an IPO arrangement called a SPAC (Special Purpose Acquisition Company). The main advantage of a SPAC is that a company has far fewer regulatory requirements and can go \"public\" in a matter of months.\n

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Companies that issue securities through the primary capital market may hire investment bankers to obtain commitments from large institutional investors to purchase the securities when first offered. Small investors are often unable to buy securities at this point because the company and its investment bankers want to sell all of the available securities in a short period of time to meet the required volume, and they must focus on marketing the sale to large investors who can buy more securities at once. Marketing the sale to investors can often include a roadshow or dog and pony show, in which investment bankers and the company's leadership travel to meet with potential investors and convince them of the value of the security being issued.\n

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Prices are often volatile in the primary market because demand is often hard to predict when a security is first issued. That's why a lot of IPOs are set at low prices.\n

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A company can raise more equity in the primary market after entering the secondary market through a rights offering. The company will offer prorated rights based on shares investors already own. Another option is a private placement, where a company may sell directly to a large investor, such as a hedge fund or a bank. In this case, the shares are not made public.\n

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Secondary Capital Markets

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The secondary market is where securities are traded after the company has sold its offering on the primary market. It is also referred to as the stock market. The New York Stock Exchange (NYSE), London Stock Exchange, and Nasdaq are secondary markets. Small investors have a much better chance of trading securities on the secondary market since they are excluded from IPOs. Anyone can purchase securities on the secondary market as long as they are willing to pay the asking price per share.\n

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A broker typically purchases the securities on behalf of an investor in the secondary market. Unlike the primary market, where prices are set before an IPO takes place, prices on the secondary market fluctuate with demand. Investors will also have to pay a commission to the broker for carrying out the trade. And since the initial offering is complete, the issuing company is no longer a party to any sale between two investors, except in the case of a company stock buyback.\n

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The volume of securities traded\u00a0varies from day to day, as supply and demand fluctuate. This also has a big effect on the price.\n

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For example, after Apple's Dec. 12, 1980, IPO on the primary market, individual investors have been able to purchase Apple stock on the secondary market. Because Apple is no longer involved in the issue of its stock, investors will, essentially, deal with one another when they trade shares in the company.\n

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The secondary market has two different categories: the auction and the dealer markets. The auction market is home to the open outcry system where buyers and sellers congregate in one location and announce the prices at which they are willing to buy and sell their securities. The NYSE is one such example. In dealer markets, though, people trade through electronic networks. Most small investors trade through dealer markets.\n

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Investopedia does not provide tax, investment, or financial services and advice. The information is presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Investing involves risk, including the possible loss of principal. Investors should consider engaging a qualified financial professional to determine a suitable investment strategy.\n

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  1. U.S. Securities and Exchange Commission. "Going Public."

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What Are Capital Markets, and How Do They Work? \n
Capital markets are venues where savings and investments are channeled between suppliers and those in need of capital.
\nmore
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Listed Security: What It Is and How It Works\n
A listed security is a financial instrument that is traded through an exchange, such as the NYSE or Nasdaq.
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Financial Markets: Role in the Economy, Importance, Types, and Examples\n
Financial markets refer broadly to any marketplace where securities trading occurs, including the stock market and bond markets, among others.
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Primary Market: Definition, Types, Examples, and Secondary\n
A primary market is a market that issues new securities on an exchange, facilitated by underwriting groups and consisting of investment banks.
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Investment Banker: What They Do, Required Skills, and Examples \n
An investment banker advises corporations, governments, or other entities on how to raise capital, as well as acquisitions, mergers, and sales of businesses.
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What Is an IPO? How an Initial Public Offering Works\n
An IPO is an initial public offering, in which shares of a private company are made available to the public for the first time. An IPO allows a company to raise equity capital from public investors.
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\n\n\n\n\n\n\n\n\n\n", + "page_last_modified": "" + }, + { + "page_name": "What Is the Secondary Market? How It Works and Pricing", + "page_url": "https://www.investopedia.com/terms/s/secondarymarket.asp", + "page_snippet": "A secondary market is a market where investors purchase securities or assets from other investors, rather than from issuing companies themselves.By clicking \u201cAccept All Cookies\u201d, you agree to the storing of cookies on your device to enhance site navigation, analyze site usage, and assist in our marketing efforts. ... Please fill out this field. ... Secondary vs. Primary ... Will Kenton is an expert on the economy and investing laws and regulations. He previously held senior editorial roles at Investopedia and Kapitall Wire and holds a MA in Economics from The New School for Social Research and Doctor of Philosophy in English literature from NYU. When you buy and sell stocks, bonds, or other securities, you're participating in the secondary market, which most of us consider to be the stock market. This market is an important part of the financial system because it gives investors like you a place to conduct your financial transactions. It also provides much-needed liquidity to the market. But don't confuse it with the primary market. If these initial investors later decide to sell their stake in the company, they can do so on the secondary market. Any transactions on the secondary market occur between investors, and the proceeds of each sale go to the selling investor, not to the company that issued the stock or to the underwriting bank. Primary market prices are often set beforehand, while prices in the secondary market are determined by the basic forces of supply and demand. The secondary market is where securities are traded after they go through the primary market. It is a key part of the financial system, providing liquidity to the market. It also allows traders with a centralized location where they can make trades. Investors who deal with large and small volumes of trades have the ability to participate in the market. When you buy and sell stocks, bonds, or other securities, you're participating in the secondary market, which most of us consider to be the stock market.", + "page_result": "\n\n\n\n\n\n\n\n\n\n\nWhat Is the Secondary Market? How It Works and Pricing\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n\n\n\n\n\n
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Table of Contents\n
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Table of Contents\n\n\n
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  • The Secondary Market
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  • How It Works
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  • Types
    • \n
  • Secondary vs. Primary
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  • FAQs
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  • The Bottom Line
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  • Investing
    • \n
  • Markets
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What Is the Secondary Market? How It Works and Pricing

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What Is the Secondary Market?

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The secondary market is where investors buy and sell securities. Trades take place on the secondary market between other investors and traders rather than from the companies that issue the securities. People typically associate the secondary market with the stock market. National exchanges, such as the New York Stock Exchange (NYSE) and the NASDAQ, are secondary markets. The secondary market is where securities are traded after they are put up for sale on the primary market.\n

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Key Takeaways

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  • The secondary market provides investors and traders with a place to trade securities after they are put up for sale on the primary market.
  • Investors trade securities on the secondary market with one another rather than with the issuing entity.
  • Through massive series of independent yet interconnected trades, the secondary market drives the price of securities toward their actual value.
  • The secondary market provides liquidity to the financial system and allows smaller traders to participate.
  • The stock market and over-the-counter markets are types of secondary markets.
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Investopedia / Candra Huff

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How the Secondary Market Works

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As noted above, securities are bought and sold by investors among one another on the secondary market after they are first sold on the primary market. As such, most people call the secondary market the stock market.\n

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Transactions that occur on the secondary market are termed secondary simply because they are one step removed from the transaction that originally created the securities in question. For example, a financial institution writes a mortgage for a consumer, creating the mortgage security. The bank can then sell it to Fannie Mae on the secondary market in a secondary transaction.\n

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Though stocks are one of the most commonly traded securities, there are also other types of secondary markets. For example, investment banks and corporate and individual investors buy and sell mutual funds and bonds on secondary markets. Entities such as Fannie Mae and Freddie Mac also purchase mortgages on a secondary market.\n

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Secondary markets are important for several reasons. First, they provide liquidity to investors. Having a centralized location allows trades to take place with a large number of traders while ensuring that the value of securities isn't lost as investors buy and sell securities. It also gives small traders a chance to participate in the market.
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Types of Secondary Markets

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Stock Market

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The stock market is made up of centralized exchanges that allow buyers and sellers to come together to trade stocks and other assets. There is no contact that takes place between each party\u2014physical or otherwise. Most trading takes place electronically. Traders must abide by the rules and regulations set forth by the appropriate regulatory bodies, such as the Securities and Exchange Commission (SEC) in the United States.\n

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Examples of stock markets (or secondary markets) include the NYSE and Nasdaq in the U.S., as well as the London Stock Exchange (LSE), the Hong Kong Stock Exchange, the Bombay Stock Exchange, and the Frankfurt Stock Exchange.\n

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Over-the-Counter (OTC) Market

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The over-the-counter (OTC) market involves the trading of stocks, bonds, and other financial assets. But rather than take place over a centralized exchange, trades occur through broker-dealer networks. As such, these assets aren't traded on an exchange. Stocks on the OTC market are normally those of smaller companies that don't meet listing requirements.\n

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OTC markets include the:\n

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  • OTCQX: This is the top-tier marketplace. The stocks of companies on the OTCQX must trade over $5.
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  • OTCQB: This is the mid-tier market for OTC securities. It is called the Venture Market and has a high number of developing companies available for trade.
    • \n
  • Pink Sheets: The Pink Sheets allow investors to trade securities of companies that can't meet the listing requirements for major exchanges. Most of the stocks listed are penny stocks.
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The number of secondary markets that exist always increases as new financial products become available. Several secondary markets may exist in the case of assets such as mortgages. Bundles of mortgages are often repackaged into securities such as Ginnie Mae pools and resold to investors.

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Secondary Market vs. Primary Market

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It is important to understand the distinction between the secondary market and the primary market. When a company issues stock or bonds for the first time and sells those securities directly to investors, that transaction occurs on the primary market.\n

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Some of the most common and well-publicized primary market transactions are initial public offerings (IPOs). During an IPO, a primary market transaction occurs between the purchasing investor and the investment bank underwriting the IPO. Any proceeds from the sale of shares of stock on the primary market go to the company that issued the stock, after accounting for the bank's administrative fees.\n

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If these initial investors later decide to sell their stake in the company, they can do so on the secondary market. Any transactions on the secondary market occur between investors, and the proceeds of each sale go to the selling investor, not to the company that issued the stock or to the underwriting bank.\n

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Primary market prices are often set beforehand, while prices in the secondary market are determined by the basic forces of supply and demand. If the majority of investors believe a stock will increase in value and rush to buy it, the stock's price will typically rise. If a company loses favor with investors or fails to post sufficient earnings, its stock price declines as demand for that security dwindles.\n

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Are the Secondary and Stock Market the Same?

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Most people consider the stock market to be the secondary market. This is where securities are traded after they are issued for the first time on the primary market. For instance, Company X would conduct its initial public offering on the primary market. Once complete, its shares are available to trade on the secondary market. Major stock exchanges like the NYSE and Nasdaq are secondary markets.

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Who Are the Major Players in the Secondary Market?

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The key participants in the secondary market are the broker-dealers who facilitate trades, investors who initiate buy and sell activity, as well as any intermediaries, such as banks, financial institutions, and advisory service companies.

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Why Is the Secondary Market Important?

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The secondary market is where securities are traded after they go through the primary market. It is a key part of the financial system, providing liquidity to the market. It also allows traders with a centralized location where they can make trades. Investors who deal with large and small volumes of trades have the ability to participate in the market.

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The Bottom Line

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When you buy and sell stocks, bonds, or other securities, you're participating in the secondary market, which most of us consider to be the stock market. This market is an important part of the financial system because it gives investors like you a place to conduct your financial transactions. It also provides much-needed liquidity to the market. But don't confuse it with the primary market. This is where companies and other entities go to offer the first-round of securities before they become available to the general public.
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  1. Federal Housing Finance Agency, "Fannie Mae and Freddie Mac."

    2. \n

  2. OTC Markets. "Our Company."

    3. \n

  3. GinnieMae. "About Us."

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Related Terms
\n
Listed Security: What It Is and How It Works\n
A listed security is a financial instrument that is traded through an exchange, such as the NYSE or Nasdaq.
\nmore
\n
OTC Pink: Definition, Company Types, Investment Risks\n
OTC Pink is the lowest tier of the three marketplaces for trading over-the-counter stocks provided and operated by the OTC Markets Group.
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\n
Financial Markets: Role in the Economy, Importance, Types, and Examples\n
Financial markets refer broadly to any marketplace where securities trading occurs, including the stock market and bond markets, among others.
\nmore
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OTCQB (The Venture Market): Definition in Stocks and Benefits\n
The OTCQB is the middle tier of the three marketplaces for trading over-the-counter (OTC) stocks operated by the OTC Markets Group.
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Overnight Trading: Definition, How It Works, and Example\n
Overnight trading refers to trades placed after an exchange\u2019s close and before its open. It extends after-hours trading. Not all exchanges offer overnight trading.
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ETF Sponsor: Who They Are and What They Do\n
An ETF sponsor is a fund manager or financial company in charge of creating and administering an exchange-traded fund.
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\n\n\n\n\n\n\n\n\n\n", + "page_last_modified": "" + }, + { + "page_name": "What is the Secondary Market? | Real Estate Exam - PrepAgent.com", + "page_url": "https://www.prepagent.com/article/secondary-market", + "page_snippet": "Agencies like these keep the secondary ... time for your exam! \u00b7 And if you do not remember anything else, just remember the secondary market is the resale marketplace....Ginnie Mae administers special assistance programs, and its main focus is to ensure liquidity for US government-insured mortgages, including those insured by the FHA and VA. Agencies like these keep the secondary market going, and the secondary market keeps the housing market going. Knowing a little about how the secondary market works will help when it\u2019s time for your exam! \u00b7 And if you do not remember anything else, just remember the secondary market is the resale marketplace. Pass your real estate exam with PrepAgent's online practice tests, animated videos, live online webinars, audio lessons, online flashcards, and more. Internet Explorer is not secure and is not supported anymore (by us or anyone else, frankly). Web developers everywhere will rejoice if you upgrade your browser to any modern browser. ... In financial terms, a primary market is where products are sold to the public. For a real estate lender, this refers to \u201cloan origination\u201d. Once a loan is originated on the primary market, it may be sold on the secondary market. Because if you understand the history, it will help you understand what the secondary market is and why it exists. Prior to the stock market crash of 1929, most lenders required a down payment of 20 to 40 percent before they would issue a loan to the borrower. If that was still the case today, not many people would ever qualify for a home loan. Basically, you\u2019d need to have a lot of money to access more money.", + "page_result": "\n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n\n \n \n \n \n\n \n\n What is the Secondary Market? | Real Estate Exam - PrepAgent.com\n\n \n \n\n \n \n\n\n\n\n\n\n\n\n\n\n\n\n\n\n \n \n\n \n\n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n\n\n\n \n\n\n\n\n \n
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\n What is the Secondary Market?\n

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In financial terms, a primary market is where products are sold to the public. For a real estate lender, this refers to “loan origination”. Once a loan is originated on the primary market, it may be sold on the secondary market. The secondary market is where lenders and investors buy and sell existing mortgages or mortgage-backed securities. This frees up money for additional mortgage lending. So, you can think of the secondary market as the “resale marketplace” of loans.

\r\n

But let’s take a step back. Because if you understand the history, it will help you understand what the secondary market is and why it exists.

\r\n

Prior to the stock market crash of 1929, most lenders required a down payment of 20 to 40 percent before they would issue a loan to the borrower. If that was still the case today, not many people would ever qualify for a home loan. Basically, you’d need to have a lot of money to access more money. Talk about the rich getting richer!

\r\n

Not only did lenders require a large down payment, but the loan was a straight note mortgage, which meant they would only pay the interest. The term was typically 1 to 7 years, and at the end of the 7 years, if the borrower could not pay the entire balance, a new loan would be negotiated.

\r\n

After the stock market crash of 1929, the government needed to stabilize the economy and stimulate the stock market. In 1934, the government introduced FHA-insured loans. The primary purpose of the FHA is to ensure lenders from loss so that the lenders aren’t scared of lending to people with a wider variety of economic backgrounds.

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The FHA made it possible for more people to purchase a home. They did this by requiring a smaller down payment and a smaller monthly payment that would be paid back over the course of 30 years. A portion of the payment would be applied to the principal, and the remaining would pay down the interest. This is more like what we’re used to seeing today.

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A 30-year fixed-rate mortgage with monthly payments was a new concept in 1934. There was much more risk involved with this new type of lending than only lending to wealthy people with many assets. To reduce the lender’s risk, the FHA required lenders to verify the borrower's employment, have the property appraised by a neutral third party, and have a title search performed. If the government guidelines were met, then the lender would negotiate the loan.

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Both the lenders and the government knew that a 30-year loan would present a greater chance of default, so the government insured the loan. They charged the borrower a one-time up-front insurance premium based on the loan amount, and one-half percent annually on the loan balance. If the borrower defaulted on the loan and the loan amount exceeded the price of the property, the FHA would pay the difference.

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Great, right? Well…. not so fast.

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By 1938, lenders who were offering the FHA-insured loans had a problem. These banks were used to doing loans and getting money back very quickly. Once a loan was repaid, the lender would have money to lend out to a new borrower. But now, with smaller down payments and banks having to wait 30 years to recover the debt, there was not as much money on hand to lend out to new people seeking home loans.

\r\n

So in 1938, the government created the Federal National Mortgage Association, or Fannie Mae. The purpose of Fannie Mae was to buy FHA-insured mortgages from lenders. This created a secondary marketplace where loans could be re-sold to investors, which provided lenders with fresh money to lend out to new borrowers.

\r\n

Of course, a loan had to conform to Fannie Mae guidelines before the agency would purchase a loan from a lender. Today, Fannie Mae is a quasi-government agency that is privately owned, and Fannie Mae stock may be purchased on the New York Stock Exchange. Fannie Mae buys mortgages on the secondary market, pools them together, and sells them back as mortgage securities to investors on the open market. Monthly principal and interest payments are guaranteed by Fannie Mae, but not by the US government.

\r\n

In 1968, Fannie Mae was split, and the Government National Mortgage Association, or Ginnie Mae, was created. Ginnie Mae is a federally-owned corporation of the Department of Housing and Urban Development. Ginnie Mae administers special assistance programs, and its main focus is to ensure liquidity for US government-insured mortgages, including those insured by the FHA and VA.

\r\n

Agencies like these keep the secondary market going, and the secondary market keeps the housing market going. Knowing a little about how the secondary market works will help when it’s time for your exam! 

\r\n

And if you do not remember anything else, just remember the secondary market is the resale marketplace.

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\n\n \n \n \n \n \n \n\n\n \n \n \n \n \n \n\n", + "page_last_modified": "" + }, + { + "page_name": "What Is the Secondary Market? How It Works and Pricing", + "page_url": "https://www.investopedia.com/terms/s/secondarymarket.asp", + "page_snippet": "A secondary market is a market where investors purchase securities or assets from other investors, rather than from issuing companies themselves.By clicking \u201cAccept All Cookies\u201d, you agree to the storing of cookies on your device to enhance site navigation, analyze site usage, and assist in our marketing efforts. ... Please fill out this field. ... Secondary vs. Primary ... Will Kenton is an expert on the economy and investing laws and regulations. He previously held senior editorial roles at Investopedia and Kapitall Wire and holds a MA in Economics from The New School for Social Research and Doctor of Philosophy in English literature from NYU. When you buy and sell stocks, bonds, or other securities, you're participating in the secondary market, which most of us consider to be the stock market. This market is an important part of the financial system because it gives investors like you a place to conduct your financial transactions. It also provides much-needed liquidity to the market. But don't confuse it with the primary market. If these initial investors later decide to sell their stake in the company, they can do so on the secondary market. Any transactions on the secondary market occur between investors, and the proceeds of each sale go to the selling investor, not to the company that issued the stock or to the underwriting bank. Primary market prices are often set beforehand, while prices in the secondary market are determined by the basic forces of supply and demand. The secondary market is where securities are traded after they go through the primary market. It is a key part of the financial system, providing liquidity to the market. It also allows traders with a centralized location where they can make trades. Investors who deal with large and small volumes of trades have the ability to participate in the market. When you buy and sell stocks, bonds, or other securities, you're participating in the secondary market, which most of us consider to be the stock market.", + "page_result": "\n\n\n\n\n\n\n\n\n\n\nWhat Is the Secondary Market? How It Works and Pricing\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n \n\n\n\n\n\n\n
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Table of Contents\n
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Table of Contents\n\n\n
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  • The Secondary Market
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  • How It Works
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  • Types
    • \n
  • Secondary vs. Primary
    • \n
  • FAQs
    • \n
  • The Bottom Line
\n
  • Investing
    • \n
  • Markets
\n

What Is the Secondary Market? How It Works and Pricing

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Will Kenton\n
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\nWill Kenton is an expert on the economy and investing laws and regulations. He previously held senior editorial roles at Investopedia and Kapitall Wire and holds a MA in Economics from The New School for Social Research and Doctor of Philosophy in English literature from NYU.\n
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Updated June 07, 2023
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What Is the Secondary Market?

\n

The secondary market is where investors buy and sell securities. Trades take place on the secondary market between other investors and traders rather than from the companies that issue the securities. People typically associate the secondary market with the stock market. National exchanges, such as the New York Stock Exchange (NYSE) and the NASDAQ, are secondary markets. The secondary market is where securities are traded after they are put up for sale on the primary market.\n

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Key Takeaways

\n
  • The secondary market provides investors and traders with a place to trade securities after they are put up for sale on the primary market.
  • Investors trade securities on the secondary market with one another rather than with the issuing entity.
  • Through massive series of independent yet interconnected trades, the secondary market drives the price of securities toward their actual value.
  • The secondary market provides liquidity to the financial system and allows smaller traders to participate.
  • The stock market and over-the-counter markets are types of secondary markets.
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Investopedia / Candra Huff

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How the Secondary Market Works

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As noted above, securities are bought and sold by investors among one another on the secondary market after they are first sold on the primary market. As such, most people call the secondary market the stock market.\n

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\n

Transactions that occur on the secondary market are termed secondary simply because they are one step removed from the transaction that originally created the securities in question. For example, a financial institution writes a mortgage for a consumer, creating the mortgage security. The bank can then sell it to Fannie Mae on the secondary market in a secondary transaction.\n

\n
\n

Though stocks are one of the most commonly traded securities, there are also other types of secondary markets. For example, investment banks and corporate and individual investors buy and sell mutual funds and bonds on secondary markets. Entities such as Fannie Mae and Freddie Mac also purchase mortgages on a secondary market.\n

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Secondary markets are important for several reasons. First, they provide liquidity to investors. Having a centralized location allows trades to take place with a large number of traders while ensuring that the value of securities isn't lost as investors buy and sell securities. It also gives small traders a chance to participate in the market.
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Types of Secondary Markets

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Stock Market

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The stock market is made up of centralized exchanges that allow buyers and sellers to come together to trade stocks and other assets. There is no contact that takes place between each party\u2014physical or otherwise. Most trading takes place electronically. Traders must abide by the rules and regulations set forth by the appropriate regulatory bodies, such as the Securities and Exchange Commission (SEC) in the United States.\n

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Examples of stock markets (or secondary markets) include the NYSE and Nasdaq in the U.S., as well as the London Stock Exchange (LSE), the Hong Kong Stock Exchange, the Bombay Stock Exchange, and the Frankfurt Stock Exchange.\n

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Over-the-Counter (OTC) Market

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The over-the-counter (OTC) market involves the trading of stocks, bonds, and other financial assets. But rather than take place over a centralized exchange, trades occur through broker-dealer networks. As such, these assets aren't traded on an exchange. Stocks on the OTC market are normally those of smaller companies that don't meet listing requirements.\n

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OTC markets include the:\n

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    \n
  • OTCQX: This is the top-tier marketplace. The stocks of companies on the OTCQX must trade over $5.
    • \n
  • OTCQB: This is the mid-tier market for OTC securities. It is called the Venture Market and has a high number of developing companies available for trade.
    • \n
  • Pink Sheets: The Pink Sheets allow investors to trade securities of companies that can't meet the listing requirements for major exchanges. Most of the stocks listed are penny stocks.
    • \n
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The number of secondary markets that exist always increases as new financial products become available. Several secondary markets may exist in the case of assets such as mortgages. Bundles of mortgages are often repackaged into securities such as Ginnie Mae pools and resold to investors.

\n

Secondary Market vs. Primary Market

\n

It is important to understand the distinction between the secondary market and the primary market. When a company issues stock or bonds for the first time and sells those securities directly to investors, that transaction occurs on the primary market.\n

\n
\n

Some of the most common and well-publicized primary market transactions are initial public offerings (IPOs). During an IPO, a primary market transaction occurs between the purchasing investor and the investment bank underwriting the IPO. Any proceeds from the sale of shares of stock on the primary market go to the company that issued the stock, after accounting for the bank's administrative fees.\n

\n
\n

If these initial investors later decide to sell their stake in the company, they can do so on the secondary market. Any transactions on the secondary market occur between investors, and the proceeds of each sale go to the selling investor, not to the company that issued the stock or to the underwriting bank.\n

\n
\n

Primary market prices are often set beforehand, while prices in the secondary market are determined by the basic forces of supply and demand. If the majority of investors believe a stock will increase in value and rush to buy it, the stock's price will typically rise. If a company loses favor with investors or fails to post sufficient earnings, its stock price declines as demand for that security dwindles.\n

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\n

Are the Secondary and Stock Market the Same?

\n

Most people consider the stock market to be the secondary market. This is where securities are traded after they are issued for the first time on the primary market. For instance, Company X would conduct its initial public offering on the primary market. Once complete, its shares are available to trade on the secondary market. Major stock exchanges like the NYSE and Nasdaq are secondary markets.

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\n
\n

Who Are the Major Players in the Secondary Market?

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The key participants in the secondary market are the broker-dealers who facilitate trades, investors who initiate buy and sell activity, as well as any intermediaries, such as banks, financial institutions, and advisory service companies.

\n
\n
\n

Why Is the Secondary Market Important?

\n

The secondary market is where securities are traded after they go through the primary market. It is a key part of the financial system, providing liquidity to the market. It also allows traders with a centralized location where they can make trades. Investors who deal with large and small volumes of trades have the ability to participate in the market.

\n
\n
\n

The Bottom Line

\n

When you buy and sell stocks, bonds, or other securities, you're participating in the secondary market, which most of us consider to be the stock market. This market is an important part of the financial system because it gives investors like you a place to conduct your financial transactions. It also provides much-needed liquidity to the market. But don't confuse it with the primary market. This is where companies and other entities go to offer the first-round of securities before they become available to the general public.
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Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our\neditorial policy.
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    \n

  1. Federal Housing Finance Agency, "Fannie Mae and Freddie Mac."

    2. \n

  2. OTC Markets. "Our Company."

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  3. GinnieMae. "About Us."

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The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.
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Take the Next Step to Invest
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The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.
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Related Terms
\n
Listed Security: What It Is and How It Works\n
A listed security is a financial instrument that is traded through an exchange, such as the NYSE or Nasdaq.
\nmore
\n
OTC Pink: Definition, Company Types, Investment Risks\n
OTC Pink is the lowest tier of the three marketplaces for trading over-the-counter stocks provided and operated by the OTC Markets Group.
\nmore
\n
Financial Markets: Role in the Economy, Importance, Types, and Examples\n
Financial markets refer broadly to any marketplace where securities trading occurs, including the stock market and bond markets, among others.
\nmore
\n
OTCQB (The Venture Market): Definition in Stocks and Benefits\n
The OTCQB is the middle tier of the three marketplaces for trading over-the-counter (OTC) stocks operated by the OTC Markets Group.
\nmore
\n
Overnight Trading: Definition, How It Works, and Example\n
Overnight trading refers to trades placed after an exchange\u2019s close and before its open. It extends after-hours trading. Not all exchanges offer overnight trading.
\nmore
\n
ETF Sponsor: Who They Are and What They Do\n
An ETF sponsor is a fund manager or financial company in charge of creating and administering an exchange-traded fund.
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\n\n\n\n\n\n\n\n\n\n", + "page_last_modified": "" + }, + { + "page_name": "What is the Secondary Market? | Real Estate Exam - PrepAgent.com", + "page_url": "https://www.prepagent.com/article/secondary-market", + "page_snippet": "Agencies like these keep the secondary ... time for your exam! \u00b7 And if you do not remember anything else, just remember the secondary market is the resale marketplace....Ginnie Mae administers special assistance programs, and its main focus is to ensure liquidity for US government-insured mortgages, including those insured by the FHA and VA. Agencies like these keep the secondary market going, and the secondary market keeps the housing market going. Knowing a little about how the secondary market works will help when it\u2019s time for your exam! \u00b7 And if you do not remember anything else, just remember the secondary market is the resale marketplace. Pass your real estate exam with PrepAgent's online practice tests, animated videos, live online webinars, audio lessons, online flashcards, and more. Internet Explorer is not secure and is not supported anymore (by us or anyone else, frankly). Web developers everywhere will rejoice if you upgrade your browser to any modern browser. ... In financial terms, a primary market is where products are sold to the public. For a real estate lender, this refers to \u201cloan origination\u201d. Once a loan is originated on the primary market, it may be sold on the secondary market. Because if you understand the history, it will help you understand what the secondary market is and why it exists. Prior to the stock market crash of 1929, most lenders required a down payment of 20 to 40 percent before they would issue a loan to the borrower. If that was still the case today, not many people would ever qualify for a home loan. Basically, you\u2019d need to have a lot of money to access more money.", + "page_result": "\n\n\n \n \n \n \n \n \n \n \n \n \n \n \n \n\n \n \n \n \n\n \n\n What is the Secondary Market? | Real Estate Exam - PrepAgent.com\n\n \n \n\n \n \n\n\n\n\n\n\n\n\n\n\n\n\n\n\n \n \n\n \n\n \n \n \n \n \n \n \n \n \n \n \n\n\n \n \n\n\n\n \n\n\n\n\n \n
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\n What is the Secondary Market?\n

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In financial terms, a primary market is where products are sold to the public. For a real estate lender, this refers to “loan origination”. Once a loan is originated on the primary market, it may be sold on the secondary market. The secondary market is where lenders and investors buy and sell existing mortgages or mortgage-backed securities. This frees up money for additional mortgage lending. So, you can think of the secondary market as the “resale marketplace” of loans.

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But let’s take a step back. Because if you understand the history, it will help you understand what the secondary market is and why it exists.

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Prior to the stock market crash of 1929, most lenders required a down payment of 20 to 40 percent before they would issue a loan to the borrower. If that was still the case today, not many people would ever qualify for a home loan. Basically, you’d need to have a lot of money to access more money. Talk about the rich getting richer!

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Not only did lenders require a large down payment, but the loan was a straight note mortgage, which meant they would only pay the interest. The term was typically 1 to 7 years, and at the end of the 7 years, if the borrower could not pay the entire balance, a new loan would be negotiated.

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After the stock market crash of 1929, the government needed to stabilize the economy and stimulate the stock market. In 1934, the government introduced FHA-insured loans. The primary purpose of the FHA is to ensure lenders from loss so that the lenders aren’t scared of lending to people with a wider variety of economic backgrounds.

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The FHA made it possible for more people to purchase a home. They did this by requiring a smaller down payment and a smaller monthly payment that would be paid back over the course of 30 years. A portion of the payment would be applied to the principal, and the remaining would pay down the interest. This is more like what we’re used to seeing today.

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A 30-year fixed-rate mortgage with monthly payments was a new concept in 1934. There was much more risk involved with this new type of lending than only lending to wealthy people with many assets. To reduce the lender’s risk, the FHA required lenders to verify the borrower's employment, have the property appraised by a neutral third party, and have a title search performed. If the government guidelines were met, then the lender would negotiate the loan.

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Both the lenders and the government knew that a 30-year loan would present a greater chance of default, so the government insured the loan. They charged the borrower a one-time up-front insurance premium based on the loan amount, and one-half percent annually on the loan balance. If the borrower defaulted on the loan and the loan amount exceeded the price of the property, the FHA would pay the difference.

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Great, right? Well…. not so fast.

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By 1938, lenders who were offering the FHA-insured loans had a problem. These banks were used to doing loans and getting money back very quickly. Once a loan was repaid, the lender would have money to lend out to a new borrower. But now, with smaller down payments and banks having to wait 30 years to recover the debt, there was not as much money on hand to lend out to new people seeking home loans.

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So in 1938, the government created the Federal National Mortgage Association, or Fannie Mae. The purpose of Fannie Mae was to buy FHA-insured mortgages from lenders. This created a secondary marketplace where loans could be re-sold to investors, which provided lenders with fresh money to lend out to new borrowers.

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Of course, a loan had to conform to Fannie Mae guidelines before the agency would purchase a loan from a lender. Today, Fannie Mae is a quasi-government agency that is privately owned, and Fannie Mae stock may be purchased on the New York Stock Exchange. Fannie Mae buys mortgages on the secondary market, pools them together, and sells them back as mortgage securities to investors on the open market. Monthly principal and interest payments are guaranteed by Fannie Mae, but not by the US government.

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In 1968, Fannie Mae was split, and the Government National Mortgage Association, or Ginnie Mae, was created. Ginnie Mae is a federally-owned corporation of the Department of Housing and Urban Development. Ginnie Mae administers special assistance programs, and its main focus is to ensure liquidity for US government-insured mortgages, including those insured by the FHA and VA.

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Agencies like these keep the secondary market going, and the secondary market keeps the housing market going. Knowing a little about how the secondary market works will help when it’s time for your exam! 

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And if you do not remember anything else, just remember the secondary market is the resale marketplace.

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