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Examples of a Secondary Market

Original post by Francesca Lee of Demand Media

The underwriters handling an IPO will purchase the company's shares and sell them on the primary market.

The roar of tech stock prices during the heavily publicized initial public offerings (IPO) of social networking sites have stirred investor interest (and investigations) into private stock traded in the secondary markets, according to a December 2010 report in the New York Times. But the secondary markets encompass millions of daily trades -- and billions in capital -- not just feverish tech issues. If you've bought or sold a share of a company, chances are you've engaged in the secondary markets.

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The First Public Offering

To understand the difference between primary and secondary markets, let's look at an example. The public debut of a company -- the first time it is publicly traded -- happens in the primary market, also called the new-issue market. Investors who want to purchase shares of the hot social networking company Best Network Site during the initial public offering deal directly with the issuing company's underwriters. IPOs are used to generate capital for the company; a similar effect happens when a company issues a bond to raise funds.

Auction Markets

After the IPO, shares of Best Network Site move to the public arena for trading -- the stock exchanges. The Big Board -- the NYSE Euronext -- still dominates as the largest auction exchange in the world. Here, the price of our tech company has buyers and sellers making offers for the stock. It's the first time the shares have a bid/ask price spread (buy/sell). You can only trade shares of a company on a public exchange if it has a "listing." The NYSE charges entry fees that can run up to $250,000.

Dealer Markets: Over-the-Counter Trades

The Nasdaq exemplifies the over-the-counter market. Also part of the secondary markets, the electronic exchange offers direct buying and selling between parties and handles approximately 10 million trades per day, according to its daily market summary. Stock, treasuries, bonds and other investment instruments and assets trade, creating market liquidity -- cash flow through the economy. In the secondary market, the company that issued the shares never receives any funds from these transactions; they received money for selling their shares during the IPO.

Secondary Market and Private Shares

Investors with sizable investment accounts use this neighborhood of the secondary market to purchase shares of privately held companies. Tech stocks are all the rage for buyers hoping to land an early footing with the next Facebook. But approach with caution: These companies put together buyers and sellers of private equity shares, but they're not vetted by the SEC. Neither do they report to any regulating body. Complaints about transparency are at the top of the list, and they've come under greater scrutiny in recent years, according to the New York Times.


                   

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About the Author

Francesca Lee has more than 12 years of experience as a business writer, specializing in personal finance and education. Her articles have appeared online at Wave Newspapers, Turning Point Magazine and Facsnet. Lee studied political science at the University of California, Berkeley.

Photo Credits

  • Comstock/Comstock/Getty Images


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