Features of the Secondary Market
Apart from ensuring true and fair dealing for the protection of the investors’ interest, the features of the secondary market include the following:
- Creating Liquidity: The most important feature of the secondary market is to create liquidity, that means, immediate conversation of the securities into cash. Besides, as the secondary market security can be sold and bought a number of times, it aids in liquidity creation.
- Follows the primary market: Unlike the primary market, any new security cannot be sold for the first time in the secondary market. All the new securities are first issued in the primary market and then are sold and bought in the secondary one.
- Stock Exchange: The secondary market has a particular place wherein the securities are traded, it is called the Stock Exchange. However, it is not mandatory for the trading to be performed through a stock exchange only. Even two individuals can trade them mutually and it can still be called a transaction.
- Encourages new investment: As the rates of the securities often fluctuate in the share market, many investors come to trade and earn profits, giving rise to new investment. This results in increased investment in the industrial sector.
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Types of Secondary Market
The secondary market is mainly categorized into the Stock Exchanges and Over-the-Counter markets. Given below is the brief summary of the same:
- Stock Exchange
The stock exchanges are nothing but a centralized platform that enables trading of the securities without any contact between the buyers and the sellers. The Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) are the foremost examples of the stock exchanges in India.
All the transactions taking place in the stock exchanges are subjected to constricted regulations in the securities trading. A stock exchange acts as a guarantor and thus there is no risk of the counterparty risks.
- Over-the-Counter (OTC) Markets
These are decentralized markets, mainly consisting of participants that are engaged in trading among themselves. As there is no regulatory authority involved, and the parties deal directly with each other, there are counterparty risks in the OTC markets. The FOREX (foreign exchange market) is an example of the over-the-counter market.
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