What is a Secondary Market?

A better understanding of a secondary market

A secondary market can exist for many types of securities, both public and private. For example, stock exchanges like the New York Stock Exchange or Nasdaq are secondary markets, as investors can buy or sell existing shares of stock through these exchanges.

When a company goes public and has an initial public offering (IPO), it will issue new shares. The shares will start changing hands on a secondary market, rather than the company having to create new shares anytime someone wants to buy stock.

A secondary market can also exist for private companies. When a startup has a fundraising round, it issues new shares to investors (and sometimes to employees). Once those shares are issued, shareholders may wish to sell these existing securities to other investors on the secondary market in a direct transaction with another investor, or via a secondary marketplace like Forge.

What role does a secondary market play in the private market?

Secondary markets add liquidity and transparency to the private market. While many people focus on the headlines around startup fundraising rounds, that only tells part of the story of what is happening with a private market company.

Between funding rounds, a private company’s stock might trade at different valuations on a secondary market. And having this ability to trade existing stock gives shareholders an important liquidity route. Being able to analyze private secondary market data like bid/ask spreads can also add transparency and aid price discovery in terms of where buyers and sellers sit regarding an agreement on valuations.

What are some examples of commonly traded securities in secondary markets?

Many types of securities trade on secondary markets, both public and private, such as:

• Stocks: Investors don’t have to buy new shares directly from an issuer. Stock investing, especially for public companies, generally involves secondary market trading.
• Bonds: A wide range of bonds also trade on secondary markets, such as Treasuries and corporate bonds. While an investor might invest in a primary issuance of a bond, by purchasing new bonds directly from the Treasury Department, these securities have liquidity through secondary markets. An investor could sell an existing Treasury bond to another investor through a secondary market.
• ETFs: While certain institutional investors get involved with creating new exchange-traded fund (ETF) shares, ordinary investors can easily buy or sell existing ETF shares through a secondary market, like a public stock exchange.
• Commodities: Various types of commodities can trade on secondary markets. With futures, for example, participants can trade the option to buy or sell underlying commodities, like orange juice, at a given point in the future, without having to make the deal directly with an orange orchard.

Frequently asked questions about secondary markets

How does a secondary market work?

A secondary market works by bringing together buyers and sellers to trade existing securities.

What is the difference between a secondary market and a primary market?

A primary market involves the issuance of new securities, whereas a secondary market involves trading existing securities. If an investor buys securities directly from an issuer, that would be a primary market purchase, whereas that investor might then sell those securities to another investor on a secondary market.

What are the different types of secondary markets?

There are many types of secondary markets, such as public stock exchanges, private stock marketplaces, commodities exchanges, and more.