Advantages of Secondary Market
The secondary market offers numerous advantages for issuers, investors, and the entire financial system. Some of them are mentioned below:
1. Price Discovery: The secondary market ensures price discovery by persuading investors to invest in securities depending on the different market forces (supply and demand). This enables in ensuring that the financial instruments are priced efficiently and it helps in a fair valuation of the company and investors also receive a fair value for their investments.
2. Risk Transfer: In the secondary market, investors can adjust their risk by buying and selling securities. For instance, an investor who owns a share of a company and can speculate on a potential market downturn, the investor can sell his/her ownership to another investor, thereby transferring the risk of that share to the new owner. This enables the investor to adjust their portfolios as required due to this high flexibility in the secondary market.
3. Transparency: The transactions in the secondary market are mostly transparent as information about the issued securities, the issuers and the volume of trading (lot size) are easily available to the investors. This enables investors to be well-informed and they can make the right decisions about their investments.
4. Capital Raising: The secondary market facilitates capital raising as it allows companies to issue new securities to raise funds for their operations. This can be done using the follow-on public offerings or secondary offerings.
5. Liquidity: Mobility of funds is easier which directs about the liquidity of investments. Investors can easily buy or sell previously issued securities. The secondary market makes trading easier for the investors as they can adjust their portfolios subject to the changing market conditions and further, allows them to access money quickly, if required.
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