Securities are bought and sold by investors on the secondary market. Instead of from the firms that issue the securities, trades happen on the secondary market between other investors and traders. The secondary market is frequently linked to the stock market. Secondary markets include local exchanges like the NASDAQ and the New York Stock Exchange (NYSE). After being offered for sale on the primary market, securities are exchanged on the secondary market.
How the Secondary Market Works
Securities are bought and sold by investors between one another on the secondary market after they are initially sold on the primary market, as was previously mentioned. As a result, the stock market is the most common name for the secondary market.
Simply because they are one step removed from the transaction that originated the securities in issue, secondary transactions are those that take place on the secondary market. For instance, the mortgage security is created when a financial institution issues a mortgage to a customer. The bank can then conduct a secondary transaction to sell it to Fannie Mae on the secondary market.
There are different varieties of secondary markets despite the fact that equities are among the most frequently traded securities. For instance, on secondary markets, mutual funds and bonds are bought and sold by investment banks, corporations, and individual investors. Mortgages are also bought and sold on a secondary market by organizations like Freddie Mac and Fannie Mae.1
Secondary markets are crucial for a number of factors. They first give investors liquidity. A centralized location makes it possible for transactions to occur amongst many traders while preventing the value of the securities from being lost when investors buy and sell assets. Additionally, it allows smaller merchants to take part in the market.
Types of Secondary Markets
Stock Market
Centralized exchanges that enable buyers and sellers to connect to trade stocks and other assets make up the stock market. Physical or other forms of contact between the parties are not made. The majority of trade is done electronically. The rules and guidelines established by the relevant regulatory organizations, such as the Securities and Exchange Commission (SEC) in the United States, must be followed by traders.
The NYSE and Nasdaq in the United States, as well as the London Stock Exchange (LSE), the Hong Kong Stock Exchange, the Bombay Stock Exchange, and the Frankfurt Stock Exchange are examples of stock markets (or secondary markets).
Over-the-Counter (OTC) Market
Stocks, bonds, and other financial assets are traded on the over-the-counter (OTC) market. Trades, however, take place through broker-dealer networks as opposed to a centralized exchange. As a result, these assets aren’t exchanged. Typically, smaller companies that don’t meet listing standards trade their stocks on the OTC market.
OTC markets consist of:
- OTCQX:The top-tier market is this one. Companies listed on the OTCQX must have stock prices that exceed $5.
- OTCQB: This is the OTC securities mid-tier market. Its name is the Venture Market, and there are many budding businesses there that can be traded.
- 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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