The secondary market in case of financial markets is perhaps the most important place because it is in the secondary market where financial instruments like stocks, bonds, futures and options of listed companies are bought and sold by the people who are interested in the stock market. Given below are some of the features of secondary market-
- The first and foremost feature of the secondary market is that it gives liquidity to the participants so if the seller who is in need of cash want to sell his or her stock then he or she can easily sell it in the secondary market because of the presence of buyers in the market. So for example if the individual has 1000 Microsoft stock and he or she wants to sell those stocks then the individual will not go to Microsoft CEO or board of directors rather he or she will sell his or her stocks in stock market exchange. Hence secondary market has the important feature of providing liquidity to shareholders as and when needed by them.
- Another feature of the secondary market is that there is a very little time lag between any news about company coming out in public domain and stock price of that company reflecting that news. So for example, if a construction company wins highway order from the government and that news comes in the public domain then the stock price will rise immediately reacting to the news of company winning an order from the government. Hence secondary market adjusts quickly to any new development in any stock which is listed in the stock market.
- Low transaction cost is another important feature of the secondary market because in the case of the secondary market there are so many transactions and they are possible only due to low transactions cost. So for example in the case of real estate market transaction costs are very high and that is the reason why real estate market is not liquid because any buyer or seller will think 10 times before doing transactions in real estate market due to the presence of high transaction cost which is not the case with the secondary market.
- It also performs the important function of price discovery because in case of primary market it is the company which decides the price of its own security whereas the true price discovery happens only when the security starts trading on secondary market because secondary market is governed by demand and supply economics and if demand for security is more than supply then price of security will rise and vice versa.
- It also helps in providing an alternative to people for saving and investment because people who do not find traditional instruments like fixed deposit and gold attractive to invest can choose secondary market for buying equity stock of listed companies. Hence in a way secondary market provides a boost to saving and investment activity among the people of the country.
As one can see from the above that secondary market is very important both for investors as well as for the companies and that is the reason why government also try to provide an efficient and regulated secondary market to the people of the country.