Secondary market
Also written Secondary markets · Stock market · Aftermarket
The market where securities already issued are traded between investors — the money goes to the selling investor, not to the company, and the issuer's capital is unchanged.
In plain language
There are only two ways to get a share.
You can buy it from the company, when the company creates and sells it — an IPO, a rights issue, a preferential allotment. That is the primary market, and the money reaches the company's bank account and its balance sheet.
Or you can buy it from somebody who already owns it. That is the secondary market. The seller gets the money. The company gets nothing, issues nothing, and its share capital does not move by a single rupee. All that changed is the name against the shares.
That sounds like it matters less. It matters enormously — because nobody would fund a company in the primary market if there were no way back out.
How it works
The organised secondary market for securities is a stock market. The principal stock exchanges in India are the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE), and they are regulated by SEBI.
The workbook credits the secondary market with three jobs: price discovery (many investors evaluating a stock converge on a price), dissemination of information (an efficient market forces periodic, relevant, timely disclosure), and liquidity (an exit at a price that reflects the valuation, achieved cheaply).
Mechanically: trading is screen-based from member offices across the country, orders are anonymous and matched on price-time priority, and a clearing corporation nets each party's obligations and stands guarantee for the trades. Indian secondary market trades settle on a T+1 cycle.
Trading in dematerialised securities is what makes this cheap. The workbook lists the gains: quicker settlement, no risk of losing certificates, no bad deliveries through fake or mutilated certificates, easier transfer and nomination, and lower transaction costs because stamp duty is not applicable.
A worked example
A company lists after an IPO of 1 crore shares at Rs 310, raising Rs 310 crore for itself. Face value is Rs 10, so its issued and paid-up capital is Rs 10 crore.
Eighteen months later Meera sells 400 shares at Rs 742 on the NSE and Rohan buys them.
| Amount | |
|---|---|
| Consideration | 400 × Rs 742 = Rs 2,96,800 |
| Received by Meera | Rs 2,96,800 |
| Received by the company | Rs 0 |
| Change in paid-up capital | Nil — still Rs 10 crore |
Meera bought at the IPO price of Rs 310, so she books a gain of 400 × Rs 432 = Rs 1,72,800. The company is not a party to any of it.
What the registrar sees is equally undramatic: the total in the register of members is unchanged. Only the beneficial owner download from the depository now shows 400 shares against Rohan's client ID instead of Meera's — which is why, when the next dividend is declared, the warrant goes to Rohan.
Why NISM asks about it
Chapter 14 (Secondary Market Transactions) is built on this distinction, and Chapter 1 introduces it under "Liquidity" as a feature of equity capital. The examinable points are consistently: who receives the proceeds of a secondary market trade, that such transactions do not change the capital structure, the settlement cycle (T+1), and the list of advantages of trading in dematerialised form.
Common exam traps
- The company receives nothing in a secondary trade. A rising share price does not put money in the company's hands; it changes what a new issue could be priced at, nothing more.
- The offer for sale is the exception that runs the other way. It happens in the primary market, but the proceeds go to the person(s) making the offer, not to the company.
- The secondary market provides liquidity, not capital. Confusing the two is the single most common error on this chapter.
- Investors cannot trade directly. They must go through a broker who is a member of the exchange, with a trading account and KYC, plus a beneficiary account with a DP to hold the shares.
- Anonymity and price-time priority mean the best price fills first — not the largest order, and not the earliest order at a worse price.
- Overseas corporate bodies are prohibited from investing in Indian securities markets; resident investors, NRIs, corporate bodies, trusts and SEBI-registered FPIs are permitted.
Where this is taught
- Series XII · Chapter 1: Understanding Securities Markets and Performanceintroduced here
- Series IX · Chapter 1: Introduction to the Capital Marketintroduced here
- Series II-A · Chapter 1: Introduction to Securitiesintroduced here
- Series X-A · Chapter 5: Introduction to Indian Financial Marketsintroduced here
- Series XXI-B · Chapter 2: Introduction to Securities Marketsintroduced here
- Series VI · Chapter 1: Introduction to the Indian Capital Marketintroduced here
- Series XIX-C · Chapter 1: Investments Landscapeintroduced here
- Series SEBI-ICE · Chapter 5: Investment in Securities Marketintroduced here
- Series XIX-E · Chapter 1: Investments Landscapeintroduced here
- Series XXI-A · Chapter 2: Introduction to Securities Marketsintroduced here
- Series XIX-D · Chapter 1: Investments Landscapeintroduced here
- Series II-A · Chapter 14: Secondary Market Transactions
- Series X-A · Chapter 6: Securities Market Segments
Related terms
- DematerialisationConverting securities held as physical certificates into book-entry holdings: the certificates are defaced, mutilated and surrendered to the issuer, and an equivalent quantity is credited to the holder's demat account.
- Beneficial ownerThe investor who owns dematerialised securities for every practical purpose — the depository is the registered owner on the company's books, but the dividends, bonus, rights and votes are the investor's.
- Registrar and Transfer AgentThe SEBI-registered agency that keeps the investor records of a mutual fund — processing purchases and redemptions, updating folios and unit capital, and issuing account statements.
- Clearing corporationThe entity that steps between every buyer and seller in the derivatives segment by novation, becoming the counterparty to both sides and guaranteeing that the trade settles.
- Primary marketThe market where an issuer sells securities to investors for the first time and receives the money itself — the "new issue market", as against the secondary market where investors trade among themselves.
- Settlement cycleThe time window, fixed by the exchange, within which securities and funds for a trade must be delivered — T+1 in Indian secondary markets since 27 January 2023, meaning one trading day after the trade.
- Information signallingThe function of secondary-market prices that reveals what investors believe about a listed company, pushing prices up on good news and down on bad — a constant monitor pressuring issuers to perform.
- Secondaries marketThe sale of an existing investor's fund units or partnership interest to co-investors or outside buyers, usually at a negotiated discount to net asset value.
- ADR, GDR and IDRDepository receipts represent shares of a company in one country but trade on an exchange in another — American inside the US, Global outside it, Indian for foreign shares listed here.
- Real Estate Investment TrustA SEBI-registered trust that pools investors' money into commercial real estate and lists its units on a stock exchange, so rent-yielding property can be bought in small lots and sold in a day.
- Equity capitalMoney put into a company by its owners — promoters and shareholders — in return for ownership, votes and a claim on residual profits. It is never repaid and ranks last in a winding up.
- Stabilizing AgentUnder a green shoe option, the merchant banker who uses over-allotment money to buy the newly listed shares when they fall below the issue price — buying only, for 30 days, up to the over-allotment.
- Financial systemThe whole set of institutional arrangements that move funds from surplus units (households) to deficit units (companies and governments) — made up of financial markets, instruments and intermediaries.
- Capital marketThe market in which companies and governments raise long-term funds — for periods longer than a year — through shares and bonds, together with the secondary market where those securities later trade.
- Financial marketThe market in which financial assets such as equities, bonds, currencies and derivatives are created or transferred — a mechanism for dealing in financial securities and commodities at low cost.
- Close-ended fundA mutual fund scheme that sells units only in its NFO, runs for a fixed period and redeems all units at maturity — in between, investors can exit only by selling on the stock exchange, where listing is compulsory.
- Stock exchangeA body of individuals, or a body incorporated under the Companies Act, that assists, regulates or controls the business of buying, selling or dealing in securities.
- LiquidityThe degree of ease with which you can turn an investment back into cash at a fair value — one of the three pillars of investing, alongside safety and return.
- Capital appreciationThe gain made when the market value of an investment rises above what you paid for it — as distinct from income, which is the interest or dividend the investment pays you along the way.
- Securities marketThe market in which securities are issued, purchased by investors and subsequently transferred among investors — the regulated channel that moves household savings to businesses.