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Secondary Market: Primary vs. Secondary Markets

The secondary market is where existing securities such as stocks, bonds, and mortgages are bought and sold between investors, as opposed to being issued on the primary market. Common secondary markets include the New York Stock Exchange and NASDAQ. While stocks are most well-known, other asset types like mutual funds and mortgages are also traded on secondary markets. The primary distinction is that primary market transactions involve the initial sale of a new security, whereas secondary market trades are between investors and do not directly affect the issuing company.

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219 views2 pages

Secondary Market: Primary vs. Secondary Markets

The secondary market is where existing securities such as stocks, bonds, and mortgages are bought and sold between investors, as opposed to being issued on the primary market. Common secondary markets include the New York Stock Exchange and NASDAQ. While stocks are most well-known, other asset types like mutual funds and mortgages are also traded on secondary markets. The primary distinction is that primary market transactions involve the initial sale of a new security, whereas secondary market trades are between investors and do not directly affect the issuing company.

Uploaded by

deepanshu1234
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Secondary Market

The secondary market is where investors buy and sell securities they already
own. It is what most people typically think of as the "stock market," though
stocks are also sold on the primary market when they are first issued. The
national exchanges, such as the New York Stock Exchange (NYSE) and
the NASDAQ, are secondary markets.
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.

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.

Primary vs. Secondary Markets


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. Some of the most common and well-publicized primary
market transactions are IPOs, or initial public offerings. 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.

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.

Multiple Markets
The number of secondary markets that exists is always increasing as new
financial products become available. In the case of assets such as mortgages,
several secondary markets may exist. Bundles of mortgages are often
repackaged into securities such as GNMA pools and resold to investors.

The word "market" can have many different meanings, but it is used most
often as a catch-all term to denote both the primary market and the secondary
market. In fact, "primary market" and "secondary market" are both distinct
terms; the primary market refers to the market where securities are created,
while the secondary market is one in which they are traded among investors.

Knowing how the primary and secondary markets work is key to


understanding how stocks, bonds, and other securities trade. Without them,
the capital markets would be much harder to navigate and much less
profitable. We'll help you understand how these markets work and how they
relate to individual investors.

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