The Secondary Market

Definition and key takeaways

The secondary market is where investors buy and sell securities after those securities have been issued in the primary market. Trades occur between investors or through intermediaries, not with the issuing company.

Key takeaways:
* Provides liquidity and enables investors to enter and exit positions.
* Drives price discovery through supply and demand.
* Includes centralized stock exchanges and over‑the‑counter (OTC) networks.
* Proceeds from secondary sales go to the selling investor, not the issuing company.

How the secondary market works

Securities are first created and sold on the primary market (for example, an initial public offering). Once issued, those securities trade on the secondary market. Transactions are carried out between investors and facilitated by broker‑dealers, exchanges, or electronic trading systems.

Through many independent trades, the secondary market continually updates security prices to reflect new information and investor sentiment. This price discovery function helps move securities toward their fair market value.

Types of secondary markets

Stock exchanges (centralized)

Centralized exchanges bring buyers and sellers together on a regulated platform. Most trading is electronic and governed by rules set by regulators (for example, the SEC in the U.S.).

Examples:
* New York Stock Exchange (NYSE)
* Nasdaq
* London Stock Exchange (LSE)
* Hong Kong Stock Exchange
* Bombay Stock Exchange (BSE)
* Frankfurt Stock Exchange

Over‑the‑counter (OTC) markets

OTC trading occurs through broker‑dealer networks rather than on a centralized exchange. OTC markets often list smaller companies or securities that do not meet exchange listing requirements.

Common OTC tiers:
* OTCQX — top‑tier OTC marketplace with higher standards.
* OTCQB — venture‑stage market for developing companies.
* Pink Sheets — marketplace for very small or distressed companies, often penny stocks.

Note: Multiple secondary markets can exist for a single asset class. For example, mortgages and mortgage‑backed securities may trade in several secondary venues and be repackaged into pooled securities.

Secondary market vs. primary market

• Primary market: Issuers (companies or governments) sell new securities directly to investors for the first time. Proceeds from the sale go to the issuer (after underwriting fees). Examples include IPOs and bond offerings.
• Secondary market: Investors trade existing securities with one another. Proceeds from each sale go to the selling investor, not the issuer. Prices are set by supply and demand rather than prearranged subscription prices.

Major participants

• Individual and institutional investors
• Broker‑dealers and market makers
• Investment banks and trading firms
• Banks, mutual funds, pension funds, and other financial intermediaries
  These participants facilitate liquidity, execution, and price discovery.

Why the secondary market matters

• Liquidity: Enables investors to buy and sell without permanently tying up capital.
• Price discovery: Continuous trading reflects changing information and sentiments.
• Access: Centralized platforms and OTC networks allow a range of investors — large and small — to participate.
• Capital markets function: A healthy secondary market supports confidence in primary offerings by providing a clear exit path for investors.

Bottom line

The secondary market—commonly referred to as the stock market—permits trading of securities after their initial issuance. By supplying liquidity and facilitating price discovery, it is a cornerstone of the modern financial system and essential for efficient capital allocation.