The Secondary market is an effective

mechanism existing for the resale of the new

issues which gives investors the means to trade
existing securities. In the secondary market
one investors sell securities to another investor
without involving the issuing firm. The
secondary market also exists for trading of
common stock ,preferred stock, bonds,
debentures, warrants, options and future
contracts.
Secondary Market based on Securities
 Patterns of Secondary Market

Secondary Market

First Second Third Market Fourth Market

Market Market
or or
Organized Over the
stock counter
exchanges market
(OTC)
Organized Exchanges or First Market
First market allows the investors to sell securities
to another investors without the presence and
involvement of the firm that issued the securities.
The OTC Market

The OTC market is one of the most modern and

efficient securities market in the world. It is not
physically located market. Rather it consists of a
number of broker-dealers throughout the country
who are linked together through an e-mail or
electronic communications network.
Diagram of the organized exchange, OTC market,
and the third and fourth market

Third
market
Organized The OTC market
exchange
Fourth
market
The Third Market
The third market is an OTC marketing stock associated
with an exchange. A number of broker – dealers who are
not members of Stock Exchanges can make markets in
stocks of stock exchange listed firms

The Fourth Market

The Fourth Market is a market where investors sells
security directly to another investor without a broker-
dealer as middlemen. Direct investor- to-investor trades
occur through a communications network between block
traders. A block is a single transaction involving 10,000 or
more shares.
Structure of Secondary Market
Direct Search Market
The buyer and seller of a particular security
must search for each other directly for trading.
The full cost of locating a suitable trading
partner is borne by the individuals who wish to
make the trade.
Trading partner is sought relying on word-of-
mouth communication, advertising, or some
other informal mechanism.
Issues trade infrequently and usually have no
broker and Dealer.
Structure of Secondary Market
Brokered Market
Trading volume in a security becomes sufficiently
high.
Services of Brokers are available here.
Transaction cost is less compared to Direct search
market.
There should be the presence of prerequisite level
of investors’ interest in the security.
Structure of Secondary Market
Dealer Market
Brokers cannot guarantee the prompt execution
of investors’ orders which cause price risk and
potential delays for the investors.
If trading is sufficiently active in the security,
dealers may arise for maintaining an inventory in
the security.
Dealers trade on the basis of bid/ask price.
Investors can buy or sell a given amount of their
securities immediately at the quoted price.
 Structure of Secondary Market
Auction Market
A centralized physical market where trades are
carried out in a single location at publicly announced
prices.
Presence of Brokers and Dealers.
Auction markets allow investors to execute their
transactions immediately when they are willing to
accept the auction price.
It requires a large number of transactions.
Market Mechanics or Trading Mechanism
The Ordering Process
Executing an Exchange
The Role of Specialists
Executing a Nonexchange Trade
Market Mechanics and Trading Mechanism

The Ordering Process

Six questions to answer to decide on the exact number of
shares to order
1.What security do you wish to trade? Taking help, advice
and simple information from various published sources
such as Journals, Newspapers, Websites etc.
2.Do you wish to buy it or sell it? Whether you wish to
conduct a Long Sale or Short Sell? If you decide to buy the
security, do you buy on cash or on margin?
3.What is the size of your order? How many shares do you
wish to trade? Round lots and Odd lots
Market Mechanics and Trading Mechanism

The Ordering Process

4. What is the price at which you wish to conduct the trade?
To follow Market order or Limit Order.

5. Do you wish to impose any time limits within which you

wish to conduct the trade? Whether expires in a day, a week,
a month or a good-until-canceled (GTC).

6. Do you wish to impose any other conditions on the

execution of a trade? You may place a Stop-loss order in a
sell order or a Stop-buy order in a buy order.