How Does the Secondary Market Work?

The secondary market, is the financial market where dealings for the exchange of already issued securities and other instruments of financial nature like stock, options, bonds, and futures are done. This market is often referred as the after market. Another functions of "secondary market" is to refer to those loans which are sold by a mortgage institutes to various investors. Moreover, the term "secondary market" can also be deemed for the market for any used asset, or for some substitute usage of an existing item or asset where the customer base is the second market.

In the scenario of private equity, the secondary market, which is also known as private equity secondaries or secondaries deals with sale and purchase of pre existing investor commitments towards private equity funds. The investors who are interested in selling private equity investments can sale not only the current amount invested in the fund but also their residual non funded contracts of the funds.

The existence of secondary markets is very imperative for the smooth and efficient working of capital market. The secondary market facilitate the parties sale purchase and easily and transfer the securities from one investor dealer or speculator to another. Due to this reason,the liquidity of the market is very critical. Basically, the only method to form this liquidity was for investors and speculators to gather at a specific place on regular basis. As a rule of thumb, more the number of investors present for contributing and dealing in a certain marketplace, and the more the market place will be centralized, and ultimately the more liquidity will be in the market.

Basically, secondary markets are the source of interconnecting the investor's inclination towards the liquidity. In simpler words the investor does not want to bound his or her money for a longer span, because he may need the money to deal with unanticipated situations or they want to be able to utilize the capital for an comprehensive time period.

It's a fact that correct share price gives limited capital more competently when new projects are to be financed through a primary market offer, but exactness may also counts for the secondary market, because the price accuracy can be a source of reduction in various costs of management and cam make unreceptive takeover less risky. Moreover the accurateness in share price may help in the efficient allotment of debt finance either in case of debt offerings or institutional borrowing.

Source: http://ezinearticles.com/6272214

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