Secondary market
Also known as: aftermarket
The secondary market is where investors buy and sell securities from one another after the original issuance. Trades occur between investors — not with the issuer — on exchanges like the NYSE or over the counter.
The secondary market is where previously issued securities trade between investors. It stands in contrast to the primary market, where an issuer sells new securities to investors for the first time — think of an IPO. Once those shares are in investors' hands, every subsequent trade happens in the secondary market, and the issuer receives none of the proceeds.
When you buy 100 shares of a public company through your brokerage account, you're buying them from another investor in the secondary market, typically on an exchange like the New York Stock Exchange or Nasdaq, or over the counter (OTC). The price is set by supply and demand, with market makers and broker-dealers facilitating trades between buyers and sellers.
The secondary market matters because it provides liquidity. Investors are far more willing to buy newly issued securities when they know they can resell them easily later. Active secondary trading also provides continuous price discovery, so investors always know roughly what their holdings are worth.
Securities exams often break the market down further: the first market is exchange trading of listed securities, the second market is OTC trading of unlisted securities, the third market is OTC trading of exchange-listed securities, and the fourth market is direct institution-to-institution trading through electronic networks.
The primary versus secondary market distinction appears throughout the SIE, Series 6, and Series 7 exams. Know who receives the sale proceeds in each market — the issuer in the primary market, the selling investor in the secondary market — and be able to identify the first, second, third, and fourth markets by description.
Key takeaways
- The secondary market is where investors trade securities with each other after the initial issuance.
- The issuer receives proceeds only in the primary market; secondary market proceeds go to the selling investor.
- Secondary trading provides liquidity and continuous price discovery for securities.
- Exams subdivide it into the first (exchange), second (OTC unlisted), third (OTC-traded listed securities), and fourth (institution-to-institution) markets.