What is a secondary market
The secondary market is the market where securities once issued are bought and sold between investors.
Secondary market comprises of equity market and the debt market.
The instruments traded in secondary markets include securities issued in the primary market as well as derivative products like futures and options derived from securities issued in the primary market. Trading in privately placed debt or equity shares also takes place in secondary market.
It is important to note that transactions in the secondary market do not result in additional capital formation for the issuer of securities as funds are only exchanged between investors.
Functions of Secondary Market:
- The secondary market provides liquidity and marketability to securities.
- The secondary market enables price discovery for traded securities. This can help the management of companies in decision-making.
- Market prices of securities traded in the secondary market are determined by forces of demand and supply and hence they directly or indirectly reflect all available information about the security.
- Benchmark indices of the secondary market are often viewed as barometers of the economic performance of a country.
- The secondary market ensures that the interests of investors are protected at all times and good governance measures are followed by companies whose securities are listed and traded in the secondary market.
What is the difference between a primary market and a secondary market?
| Primary Market | Secondary Market |
|---|---|
| It is the market where equity or debt capital is raised by the issuers by offering securities to the investors.It is the market where equity or debt capital is raised by the issuers by offering securities to the investors. | It is the market where existing securities are traded. Here no fresh capital is raised. |
| The function is to raise long term funds through issue of securities. | The function is to provide liquidity and marketability to existing securities. |
| The prices of the securities issued are decided by the management of the company issuing securities in accordance with SEBI rules and regulations. | The market prices of securities traded are determined by the forces demand and supply in the market and hence keep on fluctuating. |
| Security can be sold to the investors just once in this market. | Here traders and investors can buy and sell existing securities as many times they want. |
| Company and the investors are involved in buying and selling the security, with company being the beneficiary of funds. | Here investors buy and sell the existing securities among themselves and funds and securities just keep changing hands from one to another. |
| Underwriters are the main intermediaries in the primary market. | Brokers are the main intermediaries in the secondary market. |
| There is no organization set up for the primary market and hence primary market does not have any physical presence. | There is a geographical setup and organizational presence for the secondary market. It is known as stock exchange. |
Stock Exchange:
According to the Securities Contracts (Regulations) Act 1956, the term ‘stock exchange’ is defined as –
“An association, organization or body of individuals, whether incorporated or not, established for the purpose of assisting, regulating and controlling of business of buying, selling or dealing in securities.”
In layman’s terms, it is a place where trading of already issued securities takes place. In earlier days it was a physical place where buyers and sellers used to meet and negotiate the price of securities for trading. It was known as a trading floor of the stock exchange. However this practice has not become obsolete.
Today, stock exchanges have become virtual, composed of an electronic network of computers where trading is done electronically.
Stock exchange provides a platform for investors to buyand sell securities from each other in an organized and regulated manner, thereby minimizing associated risks.
Stock exchanges stipulate rules for members who are permitted to transact on the exchange and for listing companies whose securities are permitted to be traded on the exchange.
Stock Exchanges in India:
The Bombay Stock Exchange (BSE) and the National Stock Exchange of India (NSE) are the two largest stock exchanges in India.
Other operational and SEBI regulated stock exchanges in India include –
- Metropolitan Stock Exchange of India Ltd. (MSE)
- Calcutta Stock Exchange
- India International Exchange (India INX) in GIFT City (Subsidiary of BSE)
- NSE International Exchange (NSE IFSC) in GIFT City (Subsidiary of NSE)
Apart from this there are three commodity exchanges regulated by SEBI –
- Multi Commodity Exchange of India Limited (MCX)
- National Commodity & Derivatives Exchange Limited (NCDEX)
- Indian Commodity Exchange (ICEX)
Earlier there were over 20 regional stock exchanges in India, but except for Calcutta Stock Exchange, remaining 19 have now been closed down.
Important Global Indices:
The world today is more interconnected that it has ever been. Hence what happens in global stock markets can have an impact on your equity investments. Hence it is always advisable to keep an eye on some important global stock market indices as well.
| INDEX | STOCK EXCHANGE | COUNTRY |
|---|---|---|
| Dow Jones Industrial Average | New York Stock Exchange | USA |
| S&P 500 | New York Stock Exchange | USA |
| Nasdaq Composite | Nasdaq | USA |
| FTSE 100 Index | London Stock Exchange | UK |
| CAC 40 Index | Euronext Paris | FRANCE |
| DAX | Frankfurt Stock Exchange | GERMANY |
| Nikkei 225 | Tokyo Stock Exchange | JAPAN |
| Straits Times | Singapore Exchange | SINGAPORE |
| Hang Seng | Hong Kong Stock Exchange | HONG KONG |
| KOSPI | Korea Exchange | SOUTH KORIA |
| Shanghai Composite | Shanghai Stock Exchange | CHINA |
Apart from these global indices, there is another thing which many Indians, especially active traders track i.e., SGX Nifty.
