INTRODUCTION TO SECONDARY MARKET

Secondary market is a market where shares initially issued are traded. Trading of securities takes place when securities are purchased or sold.This market is also known as stock market. In India, secondary market consists of recognized stock exchanges operating under rules, regulations and guidelines approved by the government. The stock exchanges are organized market where securities issued by the Companies, Central and State Government, and public bodies are traded. As per section 2(j) of the Securities Contract Regulation Act, 1956, “stock exchange” means anybody of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities.

Therefore, in nutshell, securities issued by a company for the first time are offered to the public in the primary market. Once the IPO is done and the stock is listed, they are traded in the secondary market. The main difference between the two is that in the primary market, an investor gets securities directly from the company through IPOs, while in the secondary market, one purchase securities from other investors willing to sell the same.

Equity shares, bonds, preference shares, debentures, etc. are some of the key products available in a secondary market.

Functions of Secondary Market

(i) Economic Indicator –Every major change in the economy either due to government policy or any major international event has a bearing on the secondary/stock market. So, if the stock market is doing well, it is an indicator that economy is more or less in a stable position.

(ii) Valuation of Securities –Secondary market helps in the valuation of securities through its demand and supply. The securities of those companies which are growth oriented and doing well will surely have higher demand in comparison to securities of companies which are not doing well. Consequently, the share prices of growth oriented companies will be high.

(iii) Transaction in securities is safe in the secondary market –Transactions executed in the secondary market are safe because all the trading taking place in an electronic system which is highly secure.

(iv) Contributes to economic growth –It contributes to economic growth through allocation of funds to the most efficient sector through the process of disinvestment to reinvestment. This leads to capital formation and economic growth.

Motivating people to invest in equity shares–Efficient secondary market motivate people to invest in the securities market. The reason is that the people would be less apprehensive about the riskiness of the stock market.

(i) It ensures safety and measure of fair dealing to protect investor’ interest. 

(ii) It induces companies to improve their performance since market price of shares showing at the stock exchanges is the indicator that reflects a company’s performance and is easily available to the investors.