Loading the player...

What is a 'Secondary Market'

The secondary market is where investors buy and sell securities they already own. It is what most people typically think of as the "stock market," though stocks are also sold on the primary market when they are first issued. The national exchanges, such as the New York Stock Exchange (NYSE) and the NASDAQ, are secondary markets.

BREAKING DOWN 'Secondary Market'

Though stocks are one of the most commonly traded securities, there are also other types of secondary markets. For example, investment banks and corporate and individual investors buy and sell mutual funds and bonds on secondary markets. Entities such as Fannie Mae and Freddie Mac also purchase mortgages on a secondary market.

Transactions that occur on the secondary market are termed secondary simply because they are one step removed from the transaction that originally created the securities in question. For example, a financial institution writes a mortgage for a consumer, creating the mortgage security. The bank can then sell it to Fannie Mae on the secondary market in a secondary transaction.

Primary vs. Secondary Markets

It is important to understand the distinction between the secondary market and the primary market. When a company issues stock or bonds for the first time and sells those securities directly to investors, that transaction occurs on the primary market. Some of the most common and well-publicized primary market transactions are IPOs, or initial public offerings. During an IPO, a primary market transaction occurs between the purchasing investor and the investment bank underwriting the IPO. Any proceeds from the sale of shares of stock on the primary market go to the company that issued the stock, after accounting for the bank's administrative fees.

If these initial investors later decide to sell their stake in the company, they can do so on the secondary market. Any transactions on the secondary market occur between investors, and the proceeds of each sale go to the selling investor, not to the company that issued the stock or to the underwriting bank.

Secondary Market Pricing

Primary market prices are often set beforehand, while prices in the secondary market are determined by the basic forces of supply and demand. If the majority of investors believe a stock will increase in value and rush to buy it, the stock's price will typically rise. If a company loses favor with investors or fails to post sufficient earnings, its stock price declines as demand for that security dwindles.

Multiple Markets

The number of secondary markets that exists is always increasing as new financial products become available. In the case of assets such as mortgages, several secondary markets may exist. Bundles of mortgages are often repackaged into securities such as GNMA pools and resold to investors.

RELATED TERMS
  1. Primary Distribution

    Primary distribution is the original sale of a new security issue ...
  2. Secondary Mortgage Market

    A secondary mortgage market is a market where mortgage loans ...
  3. Secondary Reserves

    Secondary reserves, also known as excess reserves, are bank assets ...
  4. Primary Mortgage Market

    The primary mortgage market is the market where borrowers and ...
  5. Qualified Mortgage

    A qualified mortgage is a mortgage that meets certain requirements ...
  6. Equity Capital Market - ECM

    The equity capital market, where financial institutions help ...
Related Articles
  1. Investing

    Active Investment Management Misses The Mark

    Active investment management offers little advantage in the secondary capital markets.
  2. Investing

    Adjusting Price Charts To Secondary Offerings

    Secondary offerings may require rapid readjustment of trading strategies.
  3. Investing

    Fannie Mae: What It Does And How It Operates

    Chances are you've heard of Fannie Mae. But do you know what it does and how it operates?
  4. Personal Finance

    New Rules May Make It Easier to Get a Mortgage

    Fannie Mae and Freddie Mac have come to terms with lenders on how to solve mortgage disputes. This could be good news for people with lower credit ratings.
  5. Investing

    Party City Slides on Surprise Secondary Offering

    Shares of Party City Holdco (NYSE: PRTY) plunged 8% on Friday after the party goods retailer abruptly announced a secondary offering of 10 million shares. The offering will be made on behalf ...
  6. IPF - Mortgage

    How Interest Rates Affect the Housing Market

    Understand how rate changes can affect home prices and learn how you can keep up.
  7. Personal Finance

    Trended Credit Data Could Increase Interest Rates for Borrowers (FNMA, EFX)

    Mortgage lenders will soon be required to use trended credit data to qualify borrowers. As a result, many borrowers could have to take higher interest rates.
  8. Insights

    How Fannie Mae And Freddie Mac Were Saved

    These mortgage giants had to be put under government conservatorship, driving home the gravity of the subprime crisis.
  9. Investing

    What is Securitization?

    Securitization is the process of converting an asset, or group of assets, into a marketable security. Often times, the securitized assets are divided into different layers, or tranches, tailored ...
RELATED FAQS
  1. Why do we need a secondary market?

    Find out why secondary markets play a crucial role in economic activity by promoting efficiency, safety, information and ... Read Answer >>
  2. After an initial public offering, does a company profit from increases in its share ...

    The short answer is "no." To understand why, you have to know how the market works. Read Answer >>
  3. The share price and company's secondary offering

    When a company increases the number of shares issued through a secondary offering, it generally has a negative effect on ... Read Answer >>
  4. Who facilitates buying and selling on the primary market?

    Learn more about the primary marketplace -- home of initial public offerings -- and the major players that make buying and ... Read Answer >>
Trading Center