Secondary markets are markets where already issued securities trade. Such securities include stocks and bonds. They involve dealings between buying and selling investors, the issuing company does not receive any money from these transactions. Registered stock exchanges are a good example of secondary markets. Stock exchanges provide a legal and convenient way for the trading of securities by providing the necessary facilities and rules that govern the transaction of securities. Secondary markets are advantageous to businesses in many ways.
When businesses or even individuals hold their money in form of shares, they can easily mobilize funds for investments. Securities traded in the secondary markets are not as liquid as cash therefore this limits the ease of accessing cash. Accumulation of funds for long-term capital projects is therefore easy and possible. The secondary market provides a convenient platform for the trade of securities hence shares can be easily converted to cash for investment.
As opposed to holding money in savings accounts, the secondary market provides investors with an opportunity to save and at the same time invest. Shareholders either earn capital gain from the resale of shares or earn dividends on shares held. Investment in shares does not require a large capital outlay therefore providing small businesses with a chance to invest and expand their portfolios.
Apart from providing the investing public a platform to trade in securities, secondary markets also offer investment advice. Stockbrokers, investment advisers and other players in the secondary market offer investors advice on complex matters that may arise in the trade of securities. Investors therefore do not need to be stock market experts to invest in stocks or bonds. With some form of advice, any interested investors can make money in the stock exchange.
Improves Corporate Governance
The shares of listed companies trade in the stock exchange, a secondary market. Managers are only custodians of the company; shareholders are the owners. Having a large variety of shareholders is beneficial to the company since managers' accountability improves: The demands of shareholders must be met hence the management has to be efficient in its operations. Management of listed companies is better than that of private companies since shareholders keep watch over the managements’ actions.
- “Financial Management”; Pandey I.M; 8th Edition; 2006
- “Intermediate Financial Management”; Brigham, Gapenski; 2003
- “Managerial Finance”; Weston, Copeland; 2004