roles of secondary market

Capital Markets can be divided into Primary Market and Secondary Market. Secondary market Secondary Market refers to a market where securities are traded after being initially offered to the public in the primary market and/or listed on the Stock exchange. It is also called as aftermarket. Majority of the trading is done in the secondary market. It comprises of Equity Markets and Debt Markets. What is the role of Secondary market? For the general investor, the secondary market provides an efficient platform for trading of his securities. For the management of the company, secondary equity markets serve as a monitoring and control conduit by facilitating value-enhancing control activities, enabling implementation of incentive-based management contracts, and aggregating information (via price discovery) that guides management decisions. Functions of the Secondary market Accuracy Function: Price accuracy can reduce the agency costs of management and make hostile takeovers a less risky proposition and thus move capital into the hands of better managers. Accurate share price aids the efficient allocation of debt finance whether debt offerings or institutional borrowings. Liquidity function: The greater the number of investors in the secondary market, more the liquid market. Continuous trading in after-market keeps it highly liquid. Price Discovery function: It provides the instant valuation of securities caused by the changes in the environment. Difference between Primary and Secondary markets Major Players in Secondary Market Brokerages and Advisory Services Commission Broker Jobber Floor Broker Taraniwalla/ Stag Odd lot dealer Budliwala Arbitrageur Security dealers Financial Intermediaries: Commercial Banks, Development Financial Institutions, Insurance Company, Mutual Funds, Non-banking Financial Companies (NBFC) Individual/ Retail Investors Major Instruments in Secondary Market Fixed Income Instruments:    Bonds    Debentures    Term/Fixed Deposit    Preference stock    Mortgage backed of Asset backed securities    Life Insurance    Annuity Pension Plan Variable Income Instruments: Equity Derivative Hybrid Income Instruments: Mutual Fund  Basket D (75% Equity + 25% loan)  Convertible Preferential Share