TYPES OF SECONDARY MARKETS
There are two types of secondary markets:
- EXCHANGES
It is a market, where there is no direct interaction between the buyer and the seller just like NYSE or NASDAQ. There is no risk as an exchange is a guarantor. Also, heavy regulations make it a safe place for the investors to trade securities. On the other hand, investors face a reasonably higher transaction cost due to exchange fees and commission.
- OVER-THE-COUNTER (OTC) MARKETS
It is a decentralized marketplace which is made up of members trading amongst themselves. Foreign exchange market (FOREX) is one type of Over-the-counter market. There is more competition amongst the members to get higher volume, so that the prices of security may diverge from seller to seller. Also, OTC markets face counterparty risk as buyer and seller deal with each other directly.
PRICING IN SECONDARY MARKETS
In the primary market, the rate of a security is set before. But, in the secondary market, the price of a security is decided by its supply and demand. For example, if most of the investors have faith in that the stock would gain going ahead, the demand for that stock goes up, and also its price. Likewise, if the investors feel the stock will lose price, they will want to sell it which results in a price drop.
IMPORTANCE OF SECONDARY MARKETS
It is a good indicator of the country’s economic status. An increase or decrease in the markets suggests a bull or bear market economy.
It helps with pricing a specific asset class by using supply and demand metrics.
Guarantees liquidity to investors allowing anyone to buy or sell the specific asset class with minimal effort.
It provides investors the opportunity to use minimal funds and earn high returns using leverage.
