A:

A secondary market covers the trading of any good, commodity, security or asset after it has been issued or created. Although most references to the secondary market are about the security trading aftermarket, there are many other secondary markets. Two of the most prominent secondary markets deal in previously owned homes and cars. Any good or asset can trade in a secondary market as long as the buyers and sellers are involved in a second, or third or fourth, etc. transaction.

Sometimes the secondary market is an actual entity, such as a stock exchange or over-the-counter (OTC) market. Other times a secondary market is simply a type of nonoriginal transaction. It may also be both. Secondary markets are crucial instruments for maintaining security, liquidity and fair valuation in a market economy.

Characteristics of a Secondary Market

Some definitions of secondary market create a very low threshold. For example, if a welding tool is intended for a professional audience but is instead purchased by a hobbyist or a college, this may be considered a secondary market transaction, all because the tool was purchased by some consumer other than for whom it was intended.

It is easiest to define a secondary market as any nonprimary market; a primary market is defined as the initial and intentionally designed transaction between an original producer and original consumer.

Secondary Market for Capital Goods

The secondary capital market is the most widely known secondary market. Private companies, corporations and governments all issue securities, such as stocks and bonds, to raise capital from the general investing public. When an issuing institution first introduces a security, the transaction is called a primary market trade.

However, the original purchasers of primary securities do not have to keep them. They can decide to sell them to other parties. This is known as the aftermarket or the secondary security market. If one stock owner instructs his broker to sell 200 stocks and another owner decides to purchase them, they are both engaged in a secondary market transaction.

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