Secondary Market is for Securities already in existence – which were issued by that organization earlier to public.This market provides both liquidity and marketability to such securities. It implies that it is a market where a security can be bought or sold at small transaction cost. Although the Secondary Market deals with the purchase and sale of old securities, the firms issuing new securities get themselves registered on a Stock Exchange by applying for listing of shares. Listing offers the investor a ‘market’ for the sale of his stock.
Existing holders get an option to exit from their investment by selling in the secondary market. The risk in a security investment is transferred from one investor (seller) to another (buyer) in the secondary markets. Thus, the primary market creates financial assets, and the secondary market makes them marketable.
The secondary market functions via; Stock Exchanges, and Over the Counter (OTC) Market
Stock Exchange
Stock Exchange is an organised market for the purchase and sale of second hand listed industrials and financial securities {i.e., shares and debentures of corporate companies). Listed securities are those securities which appear on the approved list of a Stock Exchange. Only listed securities are traded on the floor of the Stock Exchange. It is to be noted that an organised Stock Exchange is an ‘auction’ type of market, where the prices of traded securities are settled by open bids and offers on the floor of the exchange.
Transactions on a stock exchange are mainly done with two motives:
Investment transactions, and
Speculative transaction
Investment Transactions:
An investment transaction in securities is that transaction which is concerned with the purchase of securities, with a view to investing funds to get an income as annual dividends from these securities and gain from the sale of these securities. The basic feature of an investment transaction is that it involves the actual delivery of the security and payment of its full price. An investment transaction is motivated by the considerations of safety of investment and security of income.
Speculative Transactions:
The speculative transaction in securities is that transaction which is concerned with the purchase or sale of securities for the sake of capital appreciation. The basic feature of a speculative transaction is that the delivery of securities or the payment of the full price are rare.
The speculator neither takes delivery of the securities sold by him; instead he only receives or pays the difference between the purchase and sale prices, as the case may be. The trading in securities, without the intention of taking delivery or making payment, is called forward trading. Under the Securities Contract (Regulation) Act. 1956 forward trading was perfectly legal till it was suspended in 1969 along with all the regulatory and penal measures.