Secondary Purchase (Finance) - Explained
What is a Secondary Purchase?
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Table of ContentsWhat is a Secondary Purchase?How Does a Secondary Purchase Work?Primary vs. Secondary MarketsSecondary Market PricingMultiple Markets
What is a Secondary Purchase?
Secondary purchase is a term used in the finance market. It describes the act of purchasing an already existing stock or securities from other investors. Secondary purchase is a feature of secondary market, in this arrangement, instead of investors buying stocks directly from the issuing or selling company, they buy from other investors in the market. In this type of purchase, investors sell their already existing securities or stocks (which they previously bought from issuing companies) to other interested investors at an agreed price or rate.
How Does a Secondary Purchase Work?
Secondary purchase can also be referred to as stock purchase, it is a situation in the secondary stock market whereby investors buy stocks or securities already owned by other investors. Usually, in this type of purchase, investment banks, corporate groups and individual investors exchange funds, stocks or bonds that they previously purchased from the issuing company in the primary market. Many corporate groups and individual investors buy stocks in the secondary market, examples are Fannie Mae and Freddie Mac that purchase mortgages in the secondary market. Secondary purchase entails that a mutual trade agreement must exist between the investors buying and selling.
Primary vs. Secondary Markets
There is a clear distinction between primary and secondary markets and this is noteworthy for discussion. Companies that sell or issue bonds, stocks and other securities for the first time trade them in the primary market while investors that buy from them take these purchased stocks to secondary market where they resell. In the primary capital market, issuing companies offer their securities for sale through initial public offerings (IPOs). Trade transaction occur directly between the issuing company and the investor or buyer. In the secondary market on the other hand, initial investors who bought securities directly from issuing companies decided to sell their securities, investors trade securities among themselves.
Secondary Market Pricing
Primary market prices are often volatile as a result of diverse factors such as the need for an issuing company to meet specific market requirements as well as the inability to predict demand in the primary market. Market pricing in secondary market on the other hand are determined by demand and supply rates. That is, the higher the demand on a stock, the higher the tendency of the stock price to increase. In the same vein, if demand is low, there will be a decline in price. Basically, the secondary pricing is influence by the forces of demand and supply.
For different types of securities exist different types of markets, that is, the more the products, the more the markets. This explains the notion of multiple markets. Multiple markets come to be as a result of increase in products and assets that are available for trade in a secondary market. For example, there are many secondary markets where assets such as mortgages are traded. So also markets for trading securities and stocks and equities.