What is the secondary market?
The secondary market is the marketplace where investors buy and sell securities from each other rather than directly from the company. When shares are first issued, this takes place on the primary market, for example in connection with a new share issue or a stock exchange listing.
Once the shares have been issued, they are traded on the secondary market, where the price is determined by supply and demand. The company receives no new capital, but the trading creates liquidity and allows the share to be valued continuously.
In practice, the secondary market is central to the investment market because it allows investors to enter and exit positions.
How the secondary market works
Here are some common characteristics that make it easier to understand the role of the secondary market:
- Trading takes place between investors
- The company is not a party to the transaction
- The price is driven by supply and demand
- Liquidity can vary considerably
- More limited trading in unlisted companies
These factors explain how the secondary market works and what affects the ability to buy and sell securities.
When trading on the secondary market
Worth bearing in mind
When you trade on the secondary market, it is important to understand that the price can change quickly depending on market conditions, news and investors' expectations. Listed shares are traded continuously on the stock exchange, whereas secondary trading in unlisted shares is often more limited and may take place via brokers or platforms.
It is also important to be aware of the liquidity of the share in question. High liquidity makes it easier to buy and sell at reasonable prices, while low liquidity can mean wider price spreads and longer waiting times. For unlisted shares, the process can also be more manual and require agreements and an update of the share register before the change of ownership is valid.
Frequently asked questions
What is the difference between the primary and secondary markets?
On the primary market, investors buy shares directly from the company. On the secondary market, investors trade with each other.
Is there a secondary market for unlisted shares?
Yes, but it is limited and often takes place via brokers, platforms or private agreements.
How is the price set on the secondary market?
Through supply and demand. The market's view of the company affects the price level.
Is trading riskier on the secondary market?
Trading can be volatile, particularly in companies with low liquidity. It is important to understand the spread and order book depth.
Why is the secondary market important?
It creates liquidity, which allows investors to buy and sell when they want and thereby reduces risk.