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What are the Functions of the Secondary Market?
Secondary markets play a crucial role in the exchange of securities than the primary markets. Secondary markets are the place of exchange of second-hand securities, i.e., the securities that have already been issued. Therefore, these markets are the ones where the shares are bought and sold for a considerable long time. That is why secondary markets are more influential than primary markets in the case of buying and selling of shares.
Functions of Secondary Market
Secondary markets perform some very important economic activities. Some of these are as follows −
Maintaining the Fair Price of Shares
The secondary market is a market of already issued securities after the initial public offering (IPO). Capital markets run on the basis of supply and demand of shares. Secondary markets maintain the fair price of shares depending on the balance of demand and supply. As no single agent can influence the share price, the secondary markets help keep the fair prices of securities intact.
Offering Liquidity and Marketability
Second-hand shares are of no use if they cannot be sold and bought for liquid cash whenever needed. The shareholders usually use the share markets as the place where there is enough liquidity and marketability of shares. That means that the secondary markets play the role of a third party in the exchange of shares.
Without a secondary market, the buyers and sellers would be left with a self-exchange in one-to-one mode that is not quite effective till now. Therefore, the secondary market is a facilitating body of liquidity and marketability for the shareholders.
Facilitating Capital Allocation
Secondary markets facilitate capital allocation by price signaling for the primary market. By signaling the prices of shares yet to be released in the secondary market, the secondary markets help in allocating shares.
Adjusting the Portfolios
Secondary markets allow investors to adapt to adjusting portfolios of securities. That is, the secondary markets allow investors to choose shares for buying as well as for selling to build a solid portfolio of shares that offers maximum returns. Investors and shareholders can change their investment portfolios in secondary markets that cannot be done anywhere else.
Secondary markets are important agents of the facilitation of funds for buying and selling shares. They are also the point of sale and purchase of second-hand shares. By enabling investors to deal in shares with all available information, secondary share markets act as a guiding agent on whom the investors can depend.
By the nature of enabling investors to buy and sell shares at a fair price apart from enabling them to build a portfolio, the secondary markets play a key role in the exchange of shares and the smooth operation of public companies.
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