Function and usage of secondary market

A basic overview of the secondary market

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Function

Secondary marketing is important to an efficient and modern capital market. In the secondary market, securities are exchanged, sold by and transferred from one investor or speculator to another. It is therefore essential that the secondary market have a high ability for liquidation (Typically, the only single way to create this liquidity was for investors and speculators to meet at a certain place on regular basis; this is the way stock exchanges arose. As a general rule, the more the number of investors that participate in a given marketplace increases, and the more the centralization of that marketplace, the more liquid the market due to the high proportion relationship between all these factors.

Basically, secondary markets concatenate the investor's preference for liquidity (i.e., the investor's desire not to leave his or her money tied up for a long period of time, in case the investor needs it to deal with unknown circumstances) with the capital user's preference to acquire the ability to use the capital for an extended period of time.

Accurate share price specifies scarce capital more efficiently during new projects financing through a new primary market offering, but accuracy may turn into a big factor in the secondary market because: 1) the agency costs of management can be reduced due to price accuracy, besides this accuracy make hostile takeover a less risky proposition and accordingly move capital under supervision of better managers, and 2) Efficient allocation of debt finance whether debt offerings or institutional borrowing is facilitated through accurate share.

Related usage

The term secondary market may refer to markets having value things other than securities. For example, the ability to exchange intellectual property such as patents, or rights to composed music, is considered a secondary market because it gives a space for the owner to freely resell property entitlements issued by the government. Similarly, secondary markets can have the same action in some real estate contexts as well (e.g. time-share issuers shares ownership of time-share vacation homes being bought and sold outside of the official exchange set up). These have the same action as secondary stock and bond markets in allowing for estimation, providing liquidity, and financing through securitization.

Private Secondary Markets

Private secondary markets began to emerge partially due to increased compliance and reporting obligations enacted in the Sarbanes-Oxley Act of 2002. These markets are generally only available to institutional or accredited investors and allow trading of unregistered and private company securities.

In private equity, the buying and selling of pre-existing investor commitments to private equity funds is referred to as the secondary market (also often called private equity secondaries or secondaries). Sellers of private equity investments sell remaining unfunded commitments to the funds beside selling the investments in the fund.

Article Tags: Ondary Mark

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