Definition of Secondary Market and Functions
Definition of Secondary Market – Secondary market deals with buying and selling of securities. Here those securities are traded which are already issued and are listed on stock exchange.
The secondary market deals in old securities. In simple words, these market deals with buying and selling of shares. The stock exchanges, therefore, provide regular and continuous market for buying and selling of securities. This result in enhancing the liquidity in the market as well as economy.
Their role regarding supply of capital is indirect. The secondary markets can in no circumstance supply additional funds since the company is not involved in the transaction. The stock exchanges have physical existence and located in particular geographical areas. Secondary market is also known as stock exchange or capital market.
Functions of Secondary Markets:
In order to understand the definition of secondary market in in-depth, let’s also discuss its functions. Stock exchanges discharge following three vital functions in the orderly growth of capital formation:
Nexus between savings and investments:
First and foremost, they are the nexus between the savings and the investment of the community. Stock exchange mobilize and channelize the savings of community. The savings are mobilize on the basis of criteria such as good return, appreciation of capital, and so on.
It is the preference of investors for individual units as well as industry groups, which is reflected in the share price, that decides the mode of investment. Stock exchanges render this service by arranging for the preliminary distribution of new issues of capital. The capital is raised through prospectus, as also offers for sale of existing securities, in an orderly and systematic manner. All the listing procedure is align with that of stock exchanges rules and regulations. In addition to this, it also assist in the flotation of new issues by acting
(i) as brokers and
(ii) as underwriters.
They provide a market place for the purchase and sale of securities, thereby enabling their free transfer ability through several successive stages from the original subscriber to the never-ending stream of buyers, who may be buying them today to sell them at a later date for a variety of considerations like meeting their own needs of liquidity, shuffling their investment portfolios to gear up for the ever-changing market situations, and so on. Since the point of aggregate sale and purchase is centralized, with a multiplicity of buyers and sellers at any point of time, by and large, a seller has a ready purchaser and a purchaser has a ready seller at a price which can be said to be competitive. This guarantees sales ability to one who has already invested and surety of purchase to the other who desires to invest.
Continuous Price Formation:
The third major function, discharged by the stock exchanges is the process of continuous price formation. The collective judgment of many people operating simultaneously in the market, resulting in the emergence of a large number of buyers and sellers at any point of time, has the effect of bringing about changes in the levels of security prices in small graduations, thereby evening out wide swings in prices.
The ever-changing demand and supply conditions result in a continuous revaluation of assets, with today’s prices being yesterday’s prices, altered, corrected, and adjusted, and tomorrows values being again today’s values altered, corrected and adjusted. The process is an unending one.
Stock exchanges thus act as a barometer of the state of health of the nations economy, by constantly measuring its progress or otherwise. An investor can always have his eyes turned towards the stock exchanges to know, at any point of time, the value of the investments and plan his personal needs accordingly.