Secondary market
Family VII · Market & styles
Not to be confused with bear market, bearish market, primary market.
Secondary market refers to the trading of securities after their initial issuance, allowing investors to buy and sell among themselves. It encompasses exchanges and over-the-counter venues where prices are determined by supply and demand. This contrasts with the primary market, where securities are created and sold by the issuer.
How the secondary market operates
In the secondary market, transactions occur between investors, not with the issuing entity. Proceeds from these trades go to the selling investor, not the issuer. The market provides liquidity, enabling participants to convert securities into cash quickly. Price discovery happens continuously as buyers and sellers negotiate. Major secondary markets include stock exchanges like the New York Stock Exchange and Nasdaq, as well as bond and derivatives markets.
Worked example: secondary market trade
Secondary market vs. primary market
The primary market involves the initial sale of securities by the issuer, such as in an IPO or bond offering. Funds raised go to the issuer. In the secondary market, securities are traded among investors, and the issuer does not receive proceeds. The secondary market provides liquidity and continuous pricing, while the primary market facilitates capital formation.
Often confused with
- bear market
- A bear market is a prolonged period of falling prices, typically defined as a decline of 20% or more from recent highs, whereas the secondary market is a venue for trading existing securities regardless of price direction; the visible sign is that a bear market describes a market condition, while the secondary market describes a market segment.
- bearish market
- A bearish market reflects negative sentiment and expectations of declining prices, while the secondary market is the structural venue where securities trade after issuance; the visible sign is that bearish market refers to investor outlook, whereas secondary market refers to the trading mechanism.
- primary market
- The primary market is where securities are created and sold by the issuer to raise capital, while the secondary market is where those securities are subsequently traded among investors; the visible sign is that in the primary market the issuer receives proceeds, whereas in the secondary market the seller receives them.