Question

The secondary market is often believed to be a measurement of economic conditions of a country. Do you feel this is true and if so how is this the case?

Answer 1

Yes, Secondary market is a place where already issued shares and securities of various companies are trading continuously by a large group of market participants and the value of these securities are discovered regularly so the secondary market will be a reflection of sentiments of a large group of investor and there is a very high liquidity and transparency in deriving the price of various securities by fair interaction of demand and supply.

The given statement is TRUE because secondary market will be reflecting the consensus due of large number of market participants trading into the stock markets and they will be representative of the movement of various stocks by continuous interaction of demand and supply so those prices are found after introduction of a large group of market participants so these prices are highly transparent in nature and they will be reflecting the measurement of economic condition of a country to a large extent and stock markets are even futuristic in nature, so they are going to even discount the future events of an economy in advance, so it is trying to provide a highly transparent view of the economy but sometimes it works in isolation with the economy because there is an irrational exuberance and high negative correlation with the underlying situation in the economy so stock markets are often representativeof the economic situations but they are sometimes working in isolation with the prevailing economic situations as one can argue that right now economy is in tatters whereas stock market is hitting 52 week high, so stock market may discount in the future events which is related to vaccinations and hence it can be said that stock markets are clearly trying to provide with the economic situation of a country in advance of current scenario as well as the future scenario through fair mechanism of demand and supply of various security.