DEFINITION of 'Secondary Stock'

A secondary stock is a public stock offering considered riskier than blue chips because it has a smaller market capitalization. The stock can relate to any type of company, in any industry. The primary definer of a secondary stock is the company's market cap, with any company's equity shares trading under a certain "large cap" level being considered a secondary stock.

A secondary stock is also referred to as a second-tier stock.

BREAKING DOWN 'Secondary Stock'

Market capitalization, or market cap, is the market value of a company calculated by multiplying the total number of shares outstanding by the stock price. Secondary stocks are more commonly referred to as mid-, small-, or micro-cap stocks, depending on their market capitalization. The market cap of these stocks typically lies below the $1 billion threshold, although this level is a matter of opinion. The smaller market cap relates to the smaller size and profitability of the issuing firm. While the market cap is a definite driver of a stock's risk level, most market participants view large-cap stock as less risky than secondary stock. This is because the latter is issued primarily by less established and less known companies. Since the issuing companies are not as established as blue chip companies, secondary stocks tend to carry a higher level of volatility than large caps.

Secondary stocks, however, often times can be less volatile than large cap stocks, thus, all else held equal, being a less "risky" investment than a large cap. The higher volatility represents an opportunity for investors to participate in any large upswing in the price of the stock. In effect, these stocks have the potential of generating significant gains on a small investment. Since there’s a greater demand for large caps, investors may find themselves paying too high of a premium to acquire a share of these companies. As a result, investors may be forced to look toward secondary stocks for value.

An important factor that can make secondary stocks stand out is accelerated earnings growth. In addition to giving companies a higher profile among analysts and investors, healthy earnings growth gives the investment community hope that at some point these small-cap companies can capture market share and even become the market leaders. Incidentally, strong earnings growth, especially when compared to the largest player's growth, is an indication of a secondary stock issuer’s ability to compete in the market space along with the strength of its business model.

Investors must determine whether a secondary stock can continue to grow and create a presence in a given market, or if the primary player in the industry, coupled with other extraneous macro- and microeconomic factors will ultimately put that company out of business.

Some secondary stocks are listed in the New York stock Exchange (NYSE) and comprise of nearly any stock traded in the over-the-counter (OTC) market and regional stock exchanges.

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