Business Studies · Ch 12 — Financial Markets
Secondary Market
12.3.3
Secondary Market
The secondary market, also known as the stock market or stock exchange, is a market for the purchase and sale of existing securities. It helps existing investors to disinvest and fresh investors to enter, and provides liquidity and marketability to existing securities. It also contributes to economic growth by channelling funds towards the most productive investments through a continuous process of disinvestment and reinvestment. Securities are traded, cleared and settled within the regulatory framework prescribed by SEBI, and advances in information technology have made trading accessible from anywhere in the country through trading terminals.
Primary and Secondary Markets — A Comparison
| Primary Market (New Issue Market) | Secondary Market (Stock Exchange) |
|---|---|
| New companies (or existing companies making fresh issues) sell securities to investors. | Only existing shares are traded. |
| Securities are sold by the company directly to the investor (or through an intermediary). | Ownership of existing securities is exchanged between investors; the company is not involved at all. |
| The flow of funds is from savers to investors, so it directly promotes capital formation. | It enhances the encashability (liquidity) of shares, so it indirectly promotes capital formation. |