The secondary market is a place to buy and sell securities that are already owned by an investor. When people think of the “stock market,” they’re usually thinking about the secondary market.
On the secondary market, investors re-sell and buy securities that were already issued. This includes securities traded on the major stock exchanges and ones traded over-the-counter, as well as a range of other, smaller markets.
The secondary market refers to any marketplace in which previously issued securities can be traded between investors. On the secondary market, investors purchase securities from one another rather than purchasing from the entity issuing it.
The category of secondary markets encompasses a wide array of markets dealing in various types of securities. The major stock exchanges, such the New York Stock Exchange, are predominately secondary markets. So are certain government-sponsored enterprises, bond markets, and over-the-counter (OTC) markets.
Primary vs. Secondary Markets
The primary and secondary markets encompass a wide range of institutions and trade types, and it’s important to understand what makes them different from one another.
The first time a security is issued, it’s usually sold on the primary market. If investors want to sell that security later on, they’ll sell it on the secondary market.
When a security is first issued by companies or by another entity like the federal government, it is traded on the primary market. Primary-market sales take place between an investor and the financial institution underwriting the sale.
Some common examples of primary market transactions include:
IPOs: When unlisted private companies sell stocks or corporate bonds to the public for the first time, they do so by making an IPO, or Initial Public Offering. Later, when they are listed as a public company, they can sell more shares through an FPO, or Follow-On Public Offer.
Treasuries: New issues of U.S. Treasuries — T-bills, T-bonds, and T-notes — are sold at auction on the primary market. They can then be re-sold on the secondary market.
Differences Between Primary and Secondary Markets
There are significant differences in the characteristics, rules and regulations, types of investors, and securities traded on each market.
Securities are issued by a company or entity and are sold/given to investors
Securities that were issued on the primary market are traded between investors
Securities can only be sold once (for the first time)
Securities can be sold between investors as often as allowed
Prices are usually predetermined
Prices are driven by supply and demand
Most money raised from sales goes to the issuer
Investors gain or lose profit according to market conditions
Usually used by companies to generate equity capital
Generally used by companies to gauge shareholder confidence
Auction market: In an auction market, traders declare their offered buying and selling prices for each security. Exchanges like the NYSE are auction markets.
Dealer market: In a dealer market, brokers act as dealmakers, post the prices at which they are willing to buy and sell securities. Other participants can then buy and sell at those prices. Most OTC markets are dealer markets.
In addition, mutual funds are traded on the secondary market, and the mortgage market includes a secondary market component.
Stocks can also move from the OTC market to the exchange market in a process known as uplisting.
In over-the-counter, or OTC, trading, securities are bought and sold through a decentralized, electronic broker-dealer network rather than a centralized exchange. Securities sold OTC include most bonds, as well as shares in companies that may not be ready to meet the relatively strict listing requirements for the major exchanges.
Did you know
You automatically have access to 300+ OTC stocks to trade on Public once you create an account.
Major stock exchanges, such as NYSE (New York Stock Exchange) and Nasdaq, are secondary markets. This is because they are venues where investors buy and sell securities like stocks, ETFs, and bonds from one another after they have been issued through an IPO or FPO.
The primary mortgage market refers to financial institutions who act as lenders, writing mortgages for a borrower. Banks can then sell these mortgages on the secondary mortgage market, often to government-sponsored entities like Fannie Mae and Freddie Mac, who can then bundle them into mortgage-backed securities and resell them.
Benefits of Secondary Markets
Secondary markets have several important benefits for investors, including valuation, security, and liquidity. Find out more:
Value Indication: Secondary market trading helps efficiently set the price of assets and the valuation of a company. In competitive market transactions, buyers and sellers trade at prices they find reasonable according to supply and demand conditions.
Security: Capital markets such as the NYSE and the London Stock Exchange regulate the companies they list. Over-the-counter trading is less regulated, but still subject to some SEC regulation, and certain OTC brokers regulate the types of securities they list.
Liquidity: Secondary-market instruments are relatively liquid. Investors can cash in by selling their securities, such as shares in a company, on the secondary market to another investor.
Risks of Secondary Markets
Secondary markets, especially OTC markets, also come with risks to investors. It’s important to understand what these look like, including:
Volatility: Because secondary market prices are set by market conditions and the decisions of other shareholders, they can be unpredictable. When prices fluctuate, investors can experience a sudden loss, whether they are trading OTC or through a major exchange.
OTC Trading Risks: Trading over the counter comes with specific risks. These include reduced transparency, since OTC markets don’t always require companies to provide the same degree of information to the public, and higher volatility on newer “penny stocks.”
Using Public for Secondary Market Trading
Public allows investors to trade on the secondary market using your funded investment account. With Public, you can buy and sell OTC stocks, major exchange-traded stocks, and Treasury bills.
If you’re looking to buy OTC stocks, or other major exchange-traded securities, here’s how you get started:
Search for the company’s ticker symbol on Public.
Enter the number of shares you want to purchase. Note: Public doesn’t allow after-hours trading or fractional investments on OTC stocks.
You can purchase shares using a limit order or market order. Public-facilitated OTC trades default to limit order but can be adjusted to market order.
Note: Most OTC and exchange trades will settle within two business days of when they are purchased.
The Bottom Line
The secondary market encompasses a huge number of asset types and markets—from mortgage-backed-securities to ETFs to stocks and bonds. When you’re buying and selling stocks, including OTC securities, you’re most likely doing so on the secondary market.
Whether you’re planning to trade on a major exchange or over-the-counter, it’s essential to be aware of the risks when trading on the secondary market in order to make informed decisions.
What is the difference between primary and secondary market?
On the primary market, issuers offer new securities to investors. On the secondary market, investors trade those previously issued securities between themselves.
What are the types of markets in secondary market?
There are two primary types of secondary markets: over-the-counter (OTC) markets and stock exchanges. You can buy both using your investment account on Public.
What is the role of the secondary market?
Secondary market trading often allows investors to buy and sell quickly, which can reduce losses. This can also be used by investors looking to increase liquidity.
How does pricing in the secondary market work?
Whereas prices in the primary market are usually set before securities are sold, on the secondary market, supply and demand set prices. When investor demand for a given stock rises, its price increases, and when investor demand falls, so do prices for the stock.