Functions 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. The term also refers to the market for any previously used assets or goods. It includes alternative use of the commodity. For example, corn is generally used as a foodstuff, however, its secondary market involves the use of com for producing ethanol. Other names used for such markets are Stock Married or Stock Exchange.
In such markets. currently, existing securities are traded among investors or traders. These markets comprise organized stock exchanges, over-the-counter, and other such platforms.
According to the Securities Contract (Regulation) Act, 1956, “Stock exchange means anybody or individuals whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying and selling in securities”.
Functions of Secondary Market
The following are the main functions of a secondary market:
1) Ensure Liquidity of Capital:
The Stock exchanges help to convert shares and stocks into cash. These exchanges ensure that there is always a ready market for the sale and purchase of securities. It ‘ “ helps in converting stock holding into hard cash as and when required by the holder. In the absence of stock exchanges, many investors would have hesitated in blocking their money
2) Contiguous Market for Securities:
The stock exchanges offer a ready market for the exchange of securities. Once listed on the exchange, the securities keep on trading despite the continuous change in their owners. The exchanges thus act as a regular market for such securities.
3) Evaluation of Securities:
Investors can determine the true value of their holdings by using the price quotations offered by stock exchanges. These prices are determined by free demand and supply forces and thus are according to the rules of the free market.
Functions of Secondary Market
4) Mobilizing Surplus Savings:
Stock exchanges facilitate the free exchange of securities, making it easier for people with surplus funds to invest in securities and financial instruments. In the absence of stock exchanges, such people will not have a proper avenue for investing their surplus.
5) Helpful in Raising New Capital:
Capital is required by both new as well as existing business concerns. New concerns require capital for starting their business while existing concerns require funds for diversification and expansion.
Functions of Secondary Market
6) Safety in Dealings:
Stock exchanges are governed by the Securities Contract (Regulation) Act, of 1956 and thus the chances of fraud and manipulations are minimized. All the contracts are executed as per the given procedures. So, no parties have any doubts regarding the deals.
7) Listing of Securities:
Stock exchanges permit the trading of only listed securities. A corporation is required to apply to the exchange authorities if it is willing to get its securities listed. Various factors such as the prospects of the company, its management, and capital structure are critically examined for determining its eligibility.
Intermediaries in the Secondary Market– click here