Introduction
Often, Millenials and the GenZ don’t spend the time learning how to make sound investments. This situation commonly occurs because they focus on the present rather than the future. Although you don’t have to sacrifice your way of life when you’re young, adopting a longer-term perspective and investing regularly over time can guarantee that your savings and net worth are there for you when you need them.
Although the word “secondary market” can refer to a wide range of concepts, it is most frequently used as a blanket term to describe both the primary and secondary markets. In actuality, “primary market” and “secondary market” are two separate concepts; the former refers to the market where securities are created, whilst the latter is the market where investors trade securities.
Understanding how stocks, bonds, and other securities trade requires understanding the primary and secondary markets. Without them, navigating and profiting from the capital markets would be more difficult.
In this article, we’ll focus on Secondary Markets to help you understand the fundamentals of investing.
Firstly, what are Primary Markets?
When securities issued by a company are offered to the public for the first time- it takes place in the primary market. So principally, a primary market is a market where Companies issue new securities on an exchange, supported by underwriting groups and made up of investment banks. One sample of a primary market is an initial public offering or IPO. These transactions allow investors to purchase securities from the bank that handled the initial underwriting for a specific stock. Primary Markets are also known as New Issue Markets. The intermediaries in a primary market are Investment Banks that facilitate the deal, and the prices for the shares are fixed at a par value.
What Is a Secondary Markets ?
A Secondary Market is where securities are traded. Equity and debt markets are both parts of this Investment Arena. Around the world, we understand them to be ‘Stock Markets’ or ‘Share Markets’, which is understandable because the most commonly traded securities happen to stock.
What makes Secondary Markets ‘Secondary’ is that the transactions that occur are one step removed from the original Transaction- the one that created the securities in the first place. Investors trade with one another in secondary markets like the New York Stock Exchange (NYSE), the National Stock Exchange (NSE), the NASDAQ, and the London Stock Exchange (LSE), as opposed to the issuing entity. The intermediaries in secondary markets are brokers- these could be individuals, companies or broker websites. People also refer to Secondary Markets as After Investment Markets (AIMs). The Demand and Supply determine the prices of stocks in a secondary market for these stocks.
Two distinct categories exist in the secondary market:
Auction Markets
In the auction market, everyone who wishes to trade securities gathers in one space and declares the prices at which they will purchase and sell. The terms “bid” and “ask” apply to these. The assumption is that an efficient market should win out by bringing all parties together and requiring them to publicly disclose their prices.
Therefore, theoretically, finding the optimum price for an item is unnecessary because mutually agreeable pricing will arise due to the convergence of buyers and sellers. The New York Stock Exchange is the best illustration of an auction market (NYSE).
Dealer Markets
On the other hand, a dealer market does not call for parties to assemble in one place. Instead, electronic networks are used to connect market participants. The dealers keep a securities stock to transact with other market participants. The difference (also called the Spread) in the prices at which these dealers acquire and sell assets is how they make money.
The Nasdaq illustrates a dealer market where dealers, also referred to as market makers, set definite bids and ask prices at which they are willing to purchase and sell securities.
According to this premise, dealers compete to offer investors the best price.
The OTC Markets
Over-the-counter (OTC) market is a term that is occasionally used to describe a dealer market. The phrase initially referred to a system rather disorganised and where trade took place through dealer networks rather than at a physical location, as we have previously defined. The phrase likely originated from the burgeoning off-Wall Street trading during the 1920s’ great bull market, in which shares were traded “over-the-counter” on stock exchanges. In other terms, the equities were “unlisted,” meaning that stock exchanges did not list these.
Nowadays, the phrase “over-the-counter” often refers to equities that trade either on the over-the-counter bulletin board (OTCBB) or pink sheets rather than on a stock exchange such as the Nasdaq, NYSE, or American Stock Exchange (AMEX).
With this guide handy, feel free to go forth and test the waters of smart Investments.