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The Role of a Secondary Market

by David Ingram ; Updated September 26, 2017
Secondary markets are a natural byproduct of free markets.

A primary market is a formal marketplace that brings together original sellers and buyers of products. A secondary market is one in which the original buyers of the product resell the product to a third party. The distinction between primary and secondary markets is not the same as the difference between wholesale and retail; both wholesale and retail industries can have primary and secondary markets within them.

Significance

People and organizations that purchase products do not always intend to keep them forever. Original buyers may wish to replace or discontinue using a product for reasons that may include upgrading to a higher quality alternative or simply getting rid of unused products. When unwanted products are still usable, however, and when those products are still desirable to others, it is not cost-justifiable for the original buyer to simply throw the product away. Secondary markets provide a place for buyers to get rid of unwanted products without wasting them.

Types

Secondary markets can take a variety of forms, from highly informal outlets such as yard sales and selling between friends to more established marketplaces such as antiques auctions. The Internet has given rise to new national or international secondary markets for products, such as Ebay's online auction marketplace.

Financial instruments can also be sold in secondary markets. Stocks and mortgages, for example, can be traded between investors several times after the original purchase.

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Advantages

Secondary markets offer advantages to both sellers and buyers. Sellers gain the advantage of effectively reducing the purchase price of products and investments by recouping a portion of what they originally paid. Sellers in secondary markets for financial products or investments that appreciate in value can actually earn a profit on the sale by bringing in more money than they originally paid.

Buyers in secondary markets gain the advantage of having access to products at a more attractive price point than the original purchaser in most instances. In the case of financial secondary markets where buyers pay more than the seller originally paid, buyers make purchases in the hope that the investment will continue to appreciate, making any premium paid on the purchase irrelevant.

Disadvantages

If secondary markets grow too large, they can eat into original sellers' sales and profit margins. Especially in the case of long-lasting goods such as automobiles and musical instruments, secondary markets can encourage a large percentage of shoppers to purchase used items rather than purchasing new. This, in turn, can cause original manufacturers to lower their quality standards to encourage a shorter repurchase cycle on products with a large secondary market.

Counterfeiting

Counterfeiting is an ever-present reality in secondary markets for physical products. The generally unregulated nature of secondary markets, especially the more informal ones, places responsibility on the buyer to ensure that goods are authentic, which is not always easy.

About the Author

David Ingram has written for multiple publications since 2009, including "The Houston Chronicle" and online at Business.com. As a small-business owner, Ingram regularly confronts modern issues in management, marketing, finance and business law. He has earned a Bachelor of Arts in management from Walsh University.

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