The secondary market , also called the aftermarket and follow on public offering , is the financial market in which previously issued financial instruments such as stock , bonds , options , and futures are bought and sold. The initial sale of the security by the issuer to a purchaser, who pays proceeds to the issuer, is the primary market . All sales after the initial sale of the security are sales in the secondary market. Whereas the term primary market refers to the market for new issues of securities, and "[a] market is primary if the proceeds of sales go to the issuer of the securities sold," the secondary market in contrast is the market created by the later trading of such securities.
29-505: The Federal Agricultural Mortgage Corporation , also known as Farmer Mac , is a stockholder-owned, publicly traded company that was chartered by the United States federal government in 1988 to serve as a secondary market in agricultural loans such as mortgages for agricultural real estate and rural housing. The company purchases loans from agricultural lenders, and sells instruments backed by those loans. The company also works with
58-640: A central bank , such as the US Federal Reserve bank , and raising additional capital. In a worst-case scenario, depositors may demand their funds when the bank is unable to generate adequate cash without incurring substantial financial losses. In severe cases, this may result in a bank run . Banks can generally maintain as much liquidity as desired because bank deposits are insured by governments in most developed countries. A lack of liquidity can be remedied by raising deposit rates and effectively marketing deposit products. However, an important measure of
87-459: A bank's value and success is the cost of liquidity. A bank can attract significant liquid funds. Lower costs generate stronger profits, more stability, and more confidence among depositors, investors, and regulators. The market liquidity of stock depends on whether it is listed on an exchange and the level of buyer interest. The bid/ask spread is one indicator of a stock's liquidity. For liquid stocks, such as Microsoft or General Electric ,
116-469: A bid/ask spread or explicitly by charging execution commissions. By doing this, they provide the capital needed to facilitate the liquidity. The risk of illiquidity does not apply only to individual investments: whole portfolios are subject to market risk. Financial institutions and asset managers that oversee portfolios are subject to what is called "structural" and "contingent" liquidity risk . Structural liquidity risk, sometimes called funding liquidity risk,
145-411: A daily process requiring bankers to monitor and project cash flows to ensure adequate liquidity is maintained. Maintaining a balance between short-term assets and short-term liabilities is critical. For an individual bank, clients' deposits are its primary liabilities (in the sense that the bank is meant to give back all client deposits on demand), whereas reserves and loans are its primary assets (in
174-455: A liquid market is that there are always ready and willing buyers and sellers. It is similar to, but distinct from, market depth , which relates to the trade-off between quantity being sold and the price it can be sold for, rather than the liquidity trade-off between speed of sale and the price it can be sold for. A market may be considered both deep and liquid if there are ready and willing buyers and sellers in large quantities. An illiquid asset
203-478: A new primary market offering, but accuracy may also matter in the secondary market because: 1) price accuracy can reduce the agency costs of management, and make hostile takeover a less risky proposition and thus move capital into the hands of better managers; and 2) accurate share price aids the efficient allocation of debt finance whether debt offerings or institutional borrowing. The term may refer to markets in things of value other than securities. For example,
232-410: A qualified farm real estate loan to an agricultural mortgage marketing facility, or pooler, which packages these loans, and sells to investors securities that are backed by, or represent interests in, the pooled loans. Farmer Mac guarantees the timely repayment of principal and interest on these securities and, under authorities granted in 1995, can also serve as a loan pooler. The company was founded in
261-483: Is a market's feature whereby an individual or firm can quickly purchase or sell an asset without causing a drastic change in the asset's price. Liquidity involves the trade-off between the price at which an asset can be sold, and how quickly it can be sold. In a liquid market, the trade-off is mild: one can sell quickly without having to accept a significantly lower price. In a relatively illiquid market, an asset must be discounted in order to sell quickly. A liquid asset
290-405: Is an asset which can be converted into cash within a relatively short period of time, or cash itself, which can be considered the most liquid asset because it can be exchanged for goods and services instantly at face value. A liquid asset has some or all of the following features: it can be sold rapidly, with minimal loss of value, anytime within market hours. The essential characteristic of
319-402: Is an asset which is not readily salable (without a drastic price reduction, and sometimes not at any price) due to uncertainty about its value or the lack of a market in which it is regularly traded. The mortgage-related assets which resulted in the subprime mortgage crisis are examples of illiquid assets, as their value was not readily determinable despite being secured by real property. Before
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#1732780945225348-592: Is the risk associated with funding asset portfolios in the normal course of business . Contingent liquidity risk is the risk associated with finding additional funds or replacing maturing liabilities under potential, future-stressed market conditions. When a central bank tries to influence the liquidity ( supply ) of money, this process is known as open market operations . The market liquidity of assets affects their prices and expected returns. Theory and empirical evidence suggest that investors require higher return on assets with lower market liquidity to compensate them for
377-611: The United States Department of Agriculture . It is based in Washington, D.C. It was created by the Agricultural Credit Act of 1987 ( Pub. L. 100–233 ) as a federally chartered, private corporation responsible for guaranteeing the timely repayment of principal and interest to investors in a new agricultural secondary market. The secondary market allows a lending institution to sell
406-409: The ability to buy and sell intellectual property such as patents , or rights to musical compositions, is considered a secondary market because it allows the owner to freely resell property entitlements issued by the government. Similarly, secondary markets can be said to exist in some real estate contexts as well ( e.g. , ownership shares of time-share vacation homes are bought and sold outside of
435-417: The asset's own liquidity to shocks in market liquidity and the effect of market return on the asset's own liquidity. Here too, the higher the liquidity risk, the higher the expected return on the asset or the lower is its price. One example of this is a comparison of assets with and without a liquid secondary market. The liquidity discount is the reduced promised yield or expected return for such assets, like
464-401: The bond desk of one’s broker-dealer . Loans sometimes trade online, using a loan exchange. Another usage of "secondary market" is to refer to loans which are sold by a mortgage bank to investors such as Fannie Mae and Freddie Mac . The term "secondary market" is also used to refer to the market for any used goods or assets , or an alternative use for an existing product or asset where
493-817: The buying and selling of pre-existing investor commitments to private-equity funds . Sellers of private-equity investments sell not only the investments in the fund, but also their remaining unfunded commitments to the funds. Due to the increased compliance and reporting obligations on U.S. public company boards of directors and management and public accounting firms enacted in the Sarbanes–Oxley Act of 2002, private secondary markets began to emerge, such as SecondMarket and SecondaryLink. These markets are generally only available to institutional or accredited investors , and allow trading of unregistered and private company securities. Market liquidity In business , economics or investment , market liquidity
522-436: The crisis, they had moderate liquidity because it was believed that their value was generally known. Speculators and market makers are key contributors to the liquidity of a market or asset. Speculators are individuals or institutions that seek to profit from anticipated increases or decreases in a particular market price. Market makers seek to profit by charging for the immediacy of execution: either implicitly by earning
551-425: The customer base is the second market (for example, corn has been traditionally used primarily for food production and feedstock, but a "second" or "third" market has developed for use in ethanol production). In the secondary market, securities are sold by and transferred from one buyer to another. It is therefore important that the secondary market be highly liquid (originally, the only way to create this liquidity
580-620: The difference between newly issued U.S. Treasury bonds compared to off the run treasuries with the same term to maturity. Initial buyers know that other investors are less willing to buy off-the-run treasuries, so the newly issued bonds have a higher price (and hence lower yield). In the futures markets , there is no assurance that a liquid market may exist for offsetting a commodity contract at all times. Some future contracts and specific delivery months tend to have increasingly more trading activity and have higher liquidity than others. The most useful indicators of liquidity for these contracts are
609-400: The higher cost of trading these assets. That is, for an asset with given cash flow, the higher its market liquidity, the higher its price and the lower is its expected return. In addition, risk-averse investors require higher expected return if the asset's market-liquidity risk is greater. This risk involves the exposure of the asset return to shocks in overall market liquidity, the exposure of
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#1732780945225638-630: The midst of a $ 4 billion bailout of the Farm Credit System , hoping to provide an alternative source of credit to farmers following the models of Fannie Mae and Ginnie Mae . In June 2008, Farmer Mac had $ 47.2 million invested in Fannie Mae shares. Over the next few months, in the wake of the Federal takeover of Fannie Mae and Freddie Mac , these investments lost about $ 44 million in value. The company also had significant investments in
667-483: The most visible example of liquid secondary markets—in this case, for stocks of publicly traded companies. Exchanges such as the New York Stock Exchange , London Stock Exchange , and Nasdaq Stock Market provide centralized, liquid secondary markets for investors who wish to buy or sell stocks that trade on those exchanges. Most bonds and structured products trade " over the counter ", or by phoning
696-568: The newly-bankrupt Lehman Brothers Holdings . In response, the Farm Credit System bailed the company out by purchasing $ 60 million in Farmer Mac stock, and Zions Bancorporation of Salt Lake City purchased another $ 5 million in stock. Secondary market With primary issuances of securities or financial instruments (the primary market), often an underwriter purchases these securities directly from issuers , such as corporations issuing shares in an IPO or private placement . Then
725-423: The official exchange set up by the timeshare issuers). These have very similar functions as secondary stock and bond markets in allowing for speculation, providing liquidity, and financing through securitization . This facilitates liquidity and marketability of the long-term instrument. It also provides instant valuation of securities caused by changes in the environment. Private-equity secondary market refers to
754-409: The sense that these loans are owed to the bank, not by the bank). The investment portfolio represents a smaller portion of assets, and serves as the primary source of liquidity. Investment securities can be liquidated to satisfy deposit withdrawals and increased loan demand. Banks have several additional options for generating liquidity, such as selling loans, borrowing from other banks , borrowing from
783-399: The trading volume and open interest . There is also dark liquidity , referring to transactions that occur off-exchange and are therefore not visible to investors until after the transaction is complete. It does not contribute to public price discovery . In banking, liquidity is the ability to meet obligations when they come due without incurring unacceptable losses. Managing liquidity is
812-433: The underwriter re-sells the securities to other buyers, in what is referred to as a secondary market or aftermarket (or a buyer in contrast may buy directly from the federal government, in the case of a government issuing treasuries ). The secondary market can be for a variety of assets, that can vary from stocks to loans, from fragmented to centralized, and from illiquid to very liquid. The major stock exchanges are
841-496: Was for investors and speculators to meet at a fixed place regularly; this is how stock exchanges originated (see History of the Stock Exchange ). As a general rule, the greater the number of investors that participate in a given marketplace, and the greater the centralization of that marketplace, the more liquid the market. Accurate share price allocates scarce capital more efficiently when new projects are financed through
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