Secondary Trading – it’s what most people think of when they are considering investing in securities and shares. It can offer investors a great opportunity to invest and build their liquidity. Here we explain what is it and how it works.
What is Secondary Trading?
Secondary Trading is when investors, traders and speculators buy existing securities, both equity and debt, on the secondary market. The ASX (Australian Securities Exchange), NASDAQ and NYSE (New York Stock Exchange) are examples of secondary markets.
The Difference between Primary vs Secondary Trading
Primary Trading is when the shares are created, listed and sold to investors for the first time - usually through an IPO (aka an Initial Public Offering). In this instance, investors buy shares directly from the issuing company through the IPO.
On the other hand, Secondary Trading is when securities that are already listed on a stock exchange are bought and sold by traders, investors and speculators. There is no involvement by the company that issued the initial shares.
In other words, shares are initially sold in the primary market (via Primary Trading) and down the track, these securities are sold to other investors via Secondary Trading, such as the ASX in Australia.
How Secondary Trading Works
The secondary market enables the buying and selling of existing securities. Typically, a seller will have an idea of how much they want to sell their shares for, called the Ask price. Buyers will look for shares that interest them within their price range. When both buyer and seller have agreed on a share price, a trade will take place.
As with any other market, the price of shares is impacted by supply and demand. If shares are in demand and there is a limited supply, their price will increase. If demand is low or non-existent (which can happen when a company posts insufficient earnings) the price will drop.
It's important to realise that shares aren't the only thing that can be traded on the secondary market. Some of the products available via Secondary Trading are:
- equity shares
- mutual funds
- preference shares
- treasury bills
Types of Markets
There are two main types of secondary markets which facilitate Secondary Trading. Each has its own characteristics and levels of liquidity.
An organised exchange, such as the ASX, NYSE and NASDAQ, is an automated platform in which buyers and sellers are matched. In an exchange, if an agreement on share price isn’t reached, no trade takes place. An exchange requires no intermediary. Instead, it allows buyers and sellers to find their own matches. Typically exchanges offer standardised securities such as stocks, options, futures and bonds.
Sometimes called a dealer market, this market includes the Secondary Trade of securities that aren’t necessarily listed on the stock exchange, often via a dealer. Over-the-counter trades can occur in homes, over the phone, in broker’s offices, electronically, at a dealer’s office and even across foreign borders. Commercial and investment banks often offer OTC trading opportunities. Foreign currency is usually traded in the OTC market.
Secondary Trading can offer investors a great opportunity to grow and diversify their portfolio. PrimaryMarkets is a global, independent, unlisted securities and investments platform and marketplace where sellers, buyers and intermediaries can participate in off-market transactions. Contact us to discuss your investment opportunities.