Advantages & Disadvantages of Secondary Market. the secondary market is also known as the ‘after-market’. It refers to the financial market to buy and sell financial instruments and securities which have been previously issued. These financial instruments include stocks, bonds, futures, and options. Functions of Secondary Market
Advantages of Secondary Market
The following are the main advantages of the secondary market:
1) Industrial Growth and Development:
Secondary markets are important for facilitating the growth of the industry by offering a sufficient amount of capital.
2) Capital Formation:
Stock exchanges help in capital formation by inspiring investment and savings. These changes offer liquidity, profitability, and safety ‹st funds to the investors.
3) Investment Decisions:
The stock exchanges provide important information such as prices of the securities to facilitate investment decisions. The trend in stock prices indicates the company’s current financial position.
4 ) Stock Exchanges as Measuring Tools of the Economy:
A stock exchange as a measuring tool reflects the environmental changes and shows the trends in the economy and industrial status of a country.
Planning the Capital Structure
Disadvantages of the Secondary Market
The following are the main shortcomings of a secondary market:
Rampant Speculation:
In the recent past, Indian stock exchanges have seen various booms and crashes. Share prices are also much more volatile than the general price trend. These factors indicate the presence of speculative tendencies which are not very healthy.
Insider Trading:
This refers to use of the information which is not available to the general market. Such price-sensitive information may provide an extra edge to speculators.
Oligopolistic:
Indian stock market is dominated by big financial institutions and brokers, making it oligopolistic in nature. This hinders true competitiveness.
Limited Forward Trading:
Stock exchanges deal in hand delivery, forward delivery, and spot delivery. Forward trading was banned in India in 1969, adversely affecting the share prices.
Outdated Share Trading System:
Various aspects of the Indian trading system such as the margin system carry forward and settlement periods are entirely outdated.
Types of Issues in the Primary Market