Secondary Market

The secondary market is the segment of the capital market in which already-issued securities — securities that have previously been allotted in the primary market — are bought and sold among investors. When an investor sells shares in the secondary market, the money paid by the buyer goes to the selling investor, not to the company that originally issued the shares; the company received its funds only once, at the time of the original primary-market issue.

The secondary market is organised chiefly through stock exchanges, which provide the trading platform, price-discovery mechanism and settlement systems through which existing securities change hands (stock exchanges and how they function are covered in detail in the next chapter — the point to grasp here is simply that the secondary market's day-to-day working happens on and through these exchanges).

Why the secondary market matters — its link to the primary market: the two markets are not independent of each other; they are deeply complementary.

• The secondary market gives investors liquidity and marketability — the ability to convert their holding of shares or debentures back into cash at a fair, market-determined price, whenever they choose, without needing the company's involvement at all.
• It is precisely this liquidity that makes investors willing to subscribe to new issues in the primary market in the first place. An investor who knew there was no ready market to later sell a security would be far more reluctant to buy it when it was first issued, since their money would otherwise be locked in indefinitely. …