The secondary markets
permit trading in outstanding issues; that is, stocks or bonds already sold to the public are traded between current and potential owners.
- The existing owner sells to another party.
- The issuing firm does not receive proceeds and is not directly involved.
Secondary markets support primary markets.
- The secondary market provides liquidity to the individuals who acquired these securities, and the primary market benefits greatly from the liquidity provided by the secondary market because investors would hesitate to acquire securities in the primary market if they thought they could not subsequently sell them in the secondary market.
- Secondary markets are also important to issuers because the prevailing market price of the securities is determined by transactions in the secondary market. New issues of outstanding securities (seasoned securities) in the primary market are based on the prices in the secondary market. Forthcoming IPOs in the primary market are priced based on the prices of comparable stocks in the public secondary market.
Securities exchanges differ in when stocks are traded.
In a call market
, trading for individual stocks takes place at specified times
. The intent is to gather all the bids and asks for the stock and attempt to arrive at a single price
where the quantity demanded is as close as possible to the quantity supplied.
- This trading arrangement is generally used during the early stages of development of an exchange when there are few stocks listed or a small number of active investors/traders.
- Call markets also are used at the opening for stocks on the NYSE if there is an overnight buildup of buy and sell orders, in which case the opening price can differ from the prior day's closing price.
- The concept is also used if trading is suspended during the day because of some significant new information. The mechanism is considered to contribute to a more orderly market and less volatility in such instances because it attempts to avoid major up-and-down price swings.
In a continuous market
, trades occur any time
the market is open. Stocks are priced either by auction or by dealers. In an auction market, there are sufficient willing buyers and sellers to keep the market continuous. In a dealer market, enough dealers are willing to buy or sell the stock.
Please note that dealers may exist in some auction markets. These dealers provide temporary liquidity and ensure market continuity if the market does not have enough activity.
Although many exchanges are considered continuous, they (e.g., NYSE) also employ a call-market mechanism on specific occasions.