Secondary Market — Stock Exchange

The secondary market is that segment of the capital market in which securities already issued in the primary market — and already held by one investor or another — are subsequently bought and sold among investors themselves. No fresh capital reaches the issuing company from a secondary-market transaction; what changes is simply which investor holds the security, at a price the two of them (or, in practice, the exchange's own trading mechanism) agree upon. The secondary market in India is organised principally through the recognised stock exchanges — chiefly the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) — on which already-issued shares, debentures and bonds are listed and continuously traded.

A stock exchange performs several important functions for the wider financial system, well beyond simply providing a trading venue. It provides liquidity and marketability to securities — an investor who wishes to exit an investment can generally find a buyer readily through the exchange, rather than having to search for one privately, which is precisely what makes investors willing to subscribe to new issues in the primary market in the first place. It provides continuous pricing and quotation, so that at any point in time a security's current market price is publicly known, which in turn helps investors, companies and lenders alike assess the value of a holding or a piece of collateral. It ensures safety and fairness of transactions, since trading on a recognised exchange takes place under a regulated framework — dematerialised holding through depositories, standardised settlement cycles, and a clearing-corporation guarantee against counterparty default — that a purely private transaction between two strangers could not offer. It acts as an economic barometer, since movements in share prices and trading volumes across an exchange are widely read as a broad reflection of investor sentiment about companies' prospects and the economy's overall direction. And, by supporting a liquid secondary market for existing securities, a stock exchang …