What is Secondary Market?
Also known as aftermarket, is the follow on of public offering in the market. It is the place where stocks, bonds, options and futures, issued previously, are bought and sold. Simply put, it is a marketplace where securities issued earlier, are sold and purchased.
The secondary market facilitates the liquidity and marketability of securities. For management of company it serves as a monitoring and controlling channel by:
- Facilitating value buildup control activities and,
- Accumulates information with market capitalization
Secondary market provides real time valuation of securities on the basis of demand and supply.
Secondary market definition itself states that it is second-hand market, when previously issued securities are bought and sold.
Now let’s see what is secondary market for general investors, secondary market is a place which provides an efficient platform for trading of securities i.e. to provide liquidity to convert investments into cash.
Types of Secondary Market:
Over the Counter market:
OTC market refers to the process where securities are traded in an informal way i.e. that is not listed on a formal exchange.
Under this the securities that didn’t fulfill the requirements to have a listing on a standard market exchange. It is a bilateral contract, where two parties are involved i.e. the investor and dealer.
Stocks traded in OTC market are basically of smaller companies that cannot meet exchange requirements for formal exchange.
Exchange traded market:
Exchange-traded market also known as auction market is a place where all the transactions are routed through a central source (exchange) that is completely responsible for being the intermediary that connects buyers and sellers.
Market Participant in Secondary Market:
Products in Secondary market:
Equity is the ownership in a company where all the shareholders have equal rights irrespective of the number of shares held by them. This includes:
- Equity shares
- Right issue or Right share
- Bonus shares
Preferred shares also referred to as Preferred stocks. It is a form of stock which is a mix of features, not possessed by common stock properties, it is generally considered as a Hybrid Instrument.
Owners of these securities are entitled to a fixed dividend to be paid regularly before any dividend can be paid on Equity shares. The preference shares are categorized into:
- Cumulative preference shares
- Participating preference shares
G-sec is a bond or debt obligation that is issued by Reserve Bank of India on behalf of Government of India, in substitute of the central government’s market borrowing programme with a promise of repayment upon the security maturity date.
These are generally considered as low-risk investments because they are backed by the taxing power of a government.
These securities have fixed coupon that is paid on specific dates on half-yearly basis.
Debentures are referred to as long-term securities bearing a fixed rate of interest which are issued by a company and secured against the assets. These are usually payable half yearly on specific dates with principal amount repayable on maturity date.
Debentures are divided into two categories:
- Non-convertible debentures
- Convertible debentures
Bond is a negotiable instrument generally issued by a company, municipality or government agency which provides evidence of indebtedness. An investor in bond lends money to the issuer and the issuer in exchange promises to repay the loan on a specified maturity date. The issuer pays interest periodically over the tenure of the loan. Its tenure can be upto 30 years. There are various types of bonds:
- Zero Coupon Bonds
- Convertible Bonds
- Commercial paper
- Treasury Bills
How to Purchase Equity in Secondary Market?
- Open a Demat and trading account with the depository participant/broker
- Link your bank account with Demat and Trading account
- With help of broker and use of multiple trading platforms it is made easier to buy or sell shares
- The broker buys or sells the shares by executing orders on the electronic terminal provided by the stock exchange
- A contract note is issued by the broker detailing the value of shares purchased plus his brokerage cost
- The broker collects shares via settlement process(T+1) and makes payment on behalf of the investors
- Order gets executed on the final settlement date(T+2)
- The shares get credited or debited in your demat account